S&P Report Examines Calif. Earthquake Insurance

The Golden State got a jolt on Oct. 30 with a 5.6 magnitude earthquake just outside of San Jose. An article published by Standard & Poor’s Ratings Services, “Is California’s Earthquake Insurance Coverage On Shaky Ground?” said that although the quake was not severe, it was large enough to remind us that it is simply a matter of time before homeowners, the California Earthquake Authority and insurers will all have to pay. The quake occurred close to the Hayward fault, upon which about 400,000 people live.

The CEA is the largest earthquake insurance provider in California. The 11-year-old, state-created, privately funded entity is governed by state officials and has approximately 750,000 policyholders and 17 member companies.

S&P believes that CEA’s $8 billion in claims-paying ability could be inadequate if one or more major earthquakes were to occur. If claims on the CEA were larger than its ability to pay, policyholders might have to accept a prorated percentage of their expected coverage or installment payments. A severe quake that severs gas lines and leads to fires could test the financial flexibility of some insurers, the report indicated.

An analysis of the 10 largest S&P’s interactively rated homeowner insurance carriers in California shows that the insurance providers continue to maintain at least strong financial strength incorporating S&P’s 1-in-250-year catastrophe capital charge.