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Stresses Ease in California Earthquake Market

The stresses that had been building in the California earthquake market have begun to ease. The momentum of rate increases has slowed, although high-risk zones and older buildings remain challenging. Capacity has improved as carriers see a better risk-reward outlook after the significant rate increases of recent years. Higher deductibles are part of the changing landscape, due to pressure from carriers, but also as a means for buyers to manage premium costs. In an evolving market, working with a knowledge broker with broad access to markets and in-house modeling expertise can help buyers achieve better results.

 

Complacency has grown in the nearly 28 years since the deadly Northridge earthquake, but California remains a highly active seismic area. The state still faces the risk of a powerful quake within a major urban area that causes heavy loss of life and tens of billions in losses. The 7.1 magnitude Ridgecrest earthquake in July 2019 served as a wake-up call. Despite the relatively remote location about 120 miles north of Los Angeles, that quake caused more than $5 billion in estimated damages at the Naval Air Weapons Station China Lake.1

The Covid pandemic, and the associated business shutdowns and slowdowns, have not had a direct impact on the earthquake market, as the coverage is meant for a specific, named peril. Still, the pandemic tempered demand as loss of revenue led some buyers to not renew policies. That includes small landlords impacted by California’s eviction moratorium and businesses faced with the choice of buying earthquake coverage or paying employees. As capacity constraints have loosened, interest in earthquake coverage has picked up among real estate investors and property owners in the habitational, light industrial and other sectors.

This year’s hurricane losses along the U.S. Gulf Coast and in the Northeast from Hurricane Ida may still have an impact on earthquake capacity. Higher reinsurance costs have led some carriers to offer smaller limits, for instance, but carrier appetites remain uneven. Carriers that had been taking smaller tranches of placements may now be willing to increase that for some risks.

As rates have risen in recent years, so has carrier profitability, making earthquake coverage more attractive to insurers, particularly outside of the high-risk urban zones such as San Francisco and Los Angeles. While the rate of increases has moderated, better risks should expect to see increases between 5% and 15%, with most settling in the high single digits. Geographically, rate increases are smaller in the San Diego area for newer construction. Older structures and masonry buildings without documented retrofitting or seismic upgrading remain more challenging, as do habitational risks with tuck-under parking.

To manage their own risk, carriers have been seeking to move deductibles higher. At the same time, higher rates have led many insureds to take higher deductibles to offset premium increases. In an easier market, deductibles around 3% were achievable, but that has since moved into the 5%-10% range. Another indirect impact of the pandemic was that businesses seeking to preserve capital had to move to higher deductibles as revenues decreased. Businesses with loan covenants requiring the coverage could not forego it.

Moving from a 5% to 10% deductible can bring significant premium savings. On the other hand, insureds seeking lower deductibles should expect to pay more. Still, the purpose of the coverage is to help businesses rebuild and recover, so it’s important to assess how a higher deductible might prove counterproductive in the event of a damaging earthquake. A 10 percent deductible on a $10 million loss, would require the insured to put up $1 million, which many may find challenging. Given that reality, deductibles buybacks are becoming a more attractive option.

As inflation gathers momentum, construction material costs are rising. Soaring lumber costs have made the headlines, but prices for other commodities and materials are also headed sharply higher, sending reconstruction costs up as well. Clients should consider those higher costs along with the loss of revenue and income that would accompany any earthquake-caused shutdown when deciding on earthquake coverage.

Pricing for earthquake insurance is heavily driven by catastrophe models, but modeling can also help insureds to achieve better results for a specific property or portfolio. Data on improvements, retrofitting and earthquake hardening for specific properties can bring positive adjustments to carrier modeling. More precise modeling also allows businesses to better assess the amount of coverage they are likely to need in the event of an earthquake.

JULY 2019 The two Ridgecrest earthquakes, a magnitude 6.4 on July 4 followed by a 7.1 on July 5, caused more than $5 billion in estimated damages at the Naval Air Weapons Station China Lake about 120 miles north of Los Angeles. Other damage was limited due the remote location.ii 2019 JANUARY 2010 A 6.5 earthquake centered about 25 miles offshore damaged hundreds of structures in Eureka in northern California and total damages estimated around $28 million.v 2010 2003 DECEMBER 2003 A 6.6 magnitude earthquake that struck San Simeon on the central California coast near Paso Robles caused total damages of more than $230 million.vi

BOTTOM LINE

While it has been decades since a major earthquake, California remains geographically unstable. It's just a matter of time before the next major earthquake. While rates have moved higher, earthquake insurance still offers valuable and cost-effective protection. A broker with robust in-house modeling capabilities can provide a more accurate picture of potential losses to enable buyers to more closely align their coverage with their likely needs. Working with a knowledge broker that has deep experience in the earthquake market can make a significant difference in achieving the best results.

Contributors

  • Ted Clayton is Office President of the Santa Ana, California office where he specializes in Property & Marine.
  • Kevin Ronan is a Property Broker in the Irvine, California office.

ENDNOTES

  1. Ridgecrest earthquakes caused up to $5 billion in damages at China Lake naval base, Los Angeles Times, Aug. 14, 2019, https://www.latimes.com/california/story/2019-08-14/billions-earthquake-damage-china-lake-naval-base
  2. Ridgecrest earthquakes caused up to $5 billion in damages at China Lake naval base, Los Angeles Times, Aug. 14, 2019, https://www.latimes.com/california/story/2019-08-14/billions-earthquake-damage-china-lake-naval-base
  3. South Napa Earthquake scars remain after 3 years, Napa Valley Register, Aug. 23, 2017, https://napavalleyregister.com/news/local/south-napa-earthquake-scars-remain-after-years/article_488bec2c-e9e5-546f-bd83-9c5a1f9854f6.html
  4. Earthquake insurance and risk, Insurance Information Institute, March 24, 2020, https://www.iii.org/article/background-on-earthquake-insurance-and-risk
  5. 10 years later; The earthquake of 2010, North Cast Journal, Jan. 8, 2020, https://www.northcoastjournal.com/NewsBlog/archives/2020/01/09/10-years-later-the-earthquake-of-2010
  6. San Simeon earthquake shattered the calm of a sunny December morning in 2003, The Tribune News, Dec. 21, 2013, https://www.sanluisobispo.com/news/local/article39464367.html
  7. Earthquake insurance and risk, Insurance Information Institute, March 24, 2020, https://www.iii.org/article/background-on-earthquake-insurance-and-risk