New Homeowners Earthquake Rating Plan Available

Wheaton, Ill.-based American Association of Insurance Services (AAIS) has developed a new rating plan for adding earthquake coverage to policies based on standardized forms, manual rules, and rating information provided under the AAIS Homeowners Program.

The new plan consists of revised rules, rating zones, loss costs, premium modification factors, and supplementary rating information, plus a revised homeowners earthquake coverage endorsement.

The rating information features state-wide loss cost base amounts and factors that vary by rating zone to reflect a risk’s location, policy form, construction type, and deductible percentage. Premium modification factors for the owner-occupied forms also reflect a structure’s age, number of stories and (for certain structures) features designed to mitigate earthquake loss. The enhancement of the previous rating procedure was made possible by the development and growing acceptance of catastrophe modeling, the association said.

The earthquake loss costs and rating factors were developed through use of the “USQUAKE” model developed by EQECAT. USQUAKE has undergone independent review by the U.S. Geological Survey, California Geological Survey, and Pacific Earthquake Engineering Center. The California Earthquake Authority has declared the model to be suitable for public rate filings.

“Among other things, the use of modeled data has allowed AAIS to expand the number of earthquake zones (territories) within each state to differentiate among regions’ exposure to earthquakes,” the association said. The rating plan allows for more earthquake zones within almost all states. “Some of the biggest impacts may come in states you would not expect.”

For example, the association said the impact of new earthquake zones in California is not dramatic because the range of earthquake exposure in that state has long been recognized as being from moderate to high. On the other hand, the impact is more pronounced particularly in the Southeast, where there are pockets of moderate to high earthquake risk in states that generally have little exposure to earthquakes.

Nevertheless, “earthquake loss costs are not dramatically increased or decreased for any class of insured, event at the extreme ends of high and low risk,” the association said.

The new earthquake rating plan will be filed as state-specific homeowners earthquake supplements; proposed effective dates will range from Jan. 1 to July 1, 2010.

Over time, pricing of earthquake risk to the exposure may make it easier for insurance agents to sell the coverage to homeowners with relatively low exposure to earthquakes, and conversely, the cost of earthquake coverage may rise for those who need it the most, but they may be able to control their costs with appropriate construction and mitigation features, the association said.

AAIS is a national insurance advisory organization that develops standardized policy forms and rating information used by more than 600 property/casualty insurers of all sizes throughout the United States. More than 150 carriers use the AAIS Homeowners Program as the basis of their homeowners product. For information, e-mail: rickm@AAISonline.com.