Homeowner aftershock: Insurers jack up earthquake insurance rates

Following the devastating earthquakes that hit Chile and Haiti, some insurance companies are hiking rates on earthquake insurance by as much as 200%. A recentLos Angeles Times article reported that California-based GeoVera Insurance Company nearly tripled one customer's premium, from $2,500 to $7,100 a year.

The question is: Are insurers playing on homeowner's fears that an earthquake may devastate their lives, too? Or are they trying to prevent their own financial disaster from occurring?
In cases like these, one can't help but wonder whether insurers are trying to avoid future losses and get customers to drop the coverage altogether. Similar rate hikes on homeowners insurance and flood insuranceoccurred in Florida and other hurricane-prone states after Hurricane Katrina hit New Orleans and three other major hurricanes hit Florida in 2005. In 2010, State Farm even went so far as to drop 125,000 insured in the most vulnerable areas along the coasts of Florida. Friends who live within five miles of the coast tell me they can only get insurance from the state of Florida's Citizens Property Insurance Corporation, a not-for-profit government-sponsored insurer.

Are insurers right to be concerned?

Yes, says James DeWitt, former director of the Federal Emergency Management Agency (FEMA) and currently the national co-chairman of ProtectingAmerica.org. "A catastrophic event, whether an earthquake striking one of our great American cities or a massive hurricane making landfall near any of the metropolitan areas from New York to Houston, would cause such enormous damage that our economy would be stunned, private resources quickly depleted, and an immediate federal bailout of hundreds of billions of dollars could potentially be required," he said in testimony about the Homeowners' Defense Act before the U.S. House of Representatives on Wednesday.

After Hurricane Katrina, he said, $10 billion of the first $85 billion in taxpayer dollars spent were used to help people who owned uninsured or underinsured properties. Also on Wednesday, a report from Swiss Reinsurance Company indicated that the earthquake in Chile, which was the fifth strongest in 100 years, could cost insurance companies anywhere from $4 billion to $7 billion.

Insurers looked to reduce their exposure by raising rates after the 6.8 Northridge, Calif. earthquake in 1994. The earthquake caused an estimated $12.5 billion in insured losses, according to the Insurance Services Office. It was so devastating that the insurance industry paid out more on claims for this quake than it had collected in the 30 years prior, according to the Insurance Information Institute (III). After this quake, insurers began limiting their exposure to such risk by writing fewer new homeowners insurance policies. They also asked for rate increases and raised deductibles by anywhere from 10% to 15% or more.

California's coverage solution

In response to the insurance crisis that followed the Northridge quake, the California Legislature created the California Earthquake Authority (CEA), an organization aimed at making earthquake insurance available for consumers and financially viable for insurers. Privately funded but publicly managed, the organization now boasts 17 insurers in California. (Insurers who choose not to participate must offer their own earthquake coverage to policyholders).

In his testimony before Congress, DeWitt made it clear that catastrophic funds like those set up by California and Florida are the best way to "make high-quality insurance more available, and ensure that consumers realize significant cost-savings on their homeowners insurance. The best way to accomplish this is to enable and encourage more states to create well-structured, actuarially sound catastrophe funds and to supplement the protection offered by the current state catastrophe programs in California and Florida."

To get a sense of how much these policies cost, I used the quoting tool on the CEA Web site to check rates for earthquake insurance policies in Los Angeles, Sacramento and San Francisco. I said I owned a one-story home worth $500,000 that was built in 1991 or later witha wood frame -- the most common construction in California. I chose a 10% deductible, plus $5,000 personal property coverage and $1,500 coverage for loss of use. The premiums for this level of coverage were $316 a year in Sacramento, a low-risk area, but $1,770 a year in San Francisco and $969 a year in Los Angeles. That's a huge savings compared to the $7,100 a year bill GeoVera sent to its customer in Los Angeles.

Glenn Pomeroy, CEO of the CEA, testified at Wednesday's Congressional hearing on the Homeowners' Defense Act that it currently has 800,000 policies in force with $600 million in premium revenue and almost $10 billion in claim-paying capacity. The CEA now writes 70% of all residential earthquake polices sold in California.

Mike Barry of the III said each state has its own laws, and you would need to contact your insurer to find out how to get earthquake insurance. According to Barry, there is no nationwide database of earthquake insurance rates. Just be prepared for premiums of several thousands of dollars a year in high-risk areas and in low-risk areas, rates will be around $300 or $400 a year.

Are you in a high-risk area for an earthquake?

Luckily, not many of us in the U.S. are at risk of a magnitude 8.8 earthquake. Thomas Holzer, a research geologist with the Earthquake Hazards Team of US Geological Survey in Menlo Park, Calif., writes in a recent New York Times blog, "Fortunately, we do not expect magnitude-8.8 earthquakes to be widespread in the United States. Such large magnitude earthquakes require very long faults that are capable of very large earthquakes." He says only two faults in the U.S. fit that description: the Cascadia subduction zone along the coast of Washington, Oregon, and Northern California, and the Aleutian subduction zone along the southern coast of Alaska.

Even if you don't get hit by a big one, it doesn't mean you'd completely avoid significant damage from a less powerful earthquake. The III released an updated version of its earthquake report this month, called "Earthquakes: Risk and Insurance Issues." Believe it or not, 5,000 quakes strike the U.S. each year. In fact, the Institute found that since 1900, earthquakes have occurred in 39 states and damage has occurred from these quakes in all 50 states.

Here are three states, however, where the risk of a more powerful earthquake are believed to be high:
  • Missouri: In a 2008 report, FEMA looked at the possibility of a major earthquake along the New Madrid seismic zone that could impact eight Midwestern states with an earthquake as large as Chile in six Midwestern states. The study estimated that if a large quake on the central segment of the fault in Missouri were to hit, the state could see 760 fatalities and $37 billion in total economic loss. The study was conducted by the Mid-America Earthquake Center at the University of Illinois at Urbana-Champaign.
  • New York: About 24 miles north of New York City near the Indian Point nuclear power plants, there are two previously unidentified active seismic zones that intersect, according to a study by University's Lamont-Doherty Observatory. The study also found that many small faults thought to be inactive could contribute to this event.
  • California: California is predicted to experience a major earthquake by 2028, according to an April 2008 report from the US Geological Survey, USC's Southern California Earthquake Center and the State Geological Survey. The likelihood of a 7.5 quake is 37% in Southern California and 15% in Northern California.
United PolicyHolders, a non profit organization, has excellent information on buying tips for earthquake insurance. Key factors to consider include the financial strength of the company; the features and price of policies; the amount of equity you have in your home; how close you are to a fault zone; and your type of home construction. Most earthquake policies come with deductibles of 10% and 15%, and you can choose an even higher deductible in some states to save money.

Lita Epstein has written more than 25 books, including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.
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