CEA Aims to Improve Value, Affordability of Calif. Earthquake Insurance

Californians might have more reason to retrofit their homes to better withstand a major earthquake, thanks to a recently adopted building code for retrofitting existing structures. The standard, approved in August by the state Building Standards Commission, is the first step in creating incentives for people to take the steps to reinforce their most valuable asset, according to Glenn Pomeroy, president and CEO of the California Earthquake Authority.

Understanding the Risks

There’s little doubt Golden State residents need encouragement in protecting against the risks of a major earthquake. The take-up rate for homeowners earthquake insurance policies is about 12 percent, meaning approximately 90 percent of the homes in the Golden State are uninsured for earthquakes, according to CEA data.

There are several reasons why such a large segment of the housing stock in California is uninsured for earthquake risks, Pomeroy said. First, he believes there is a general misunderstanding by the public in which they think they are covered for earthquake damage under their homeowners’ policy, which is not true. Earthquake risk is excluded from the homeowners’ policy; “insurance professionals know that, but I’m not sure that every homeowner does,” he said.

Second, the CEA believes that some homeowners forego purchasing earthquake insurance because they believe that if there is a massive earthquake and major damage, the federal government will provide public aid, in essence bailing people out.

“There is a bit of a false hope if people are counting on the federal government to come in and save the day if their home is destroyed and they don’t have insurance for that home,” Pomeroy said.

Third, the CEA acknowledges that earthquake insurance can be expensive, with high deductibles especially in high-risk areas. “In these though economic times, people think they can go another year, betting that the big one is not going to come this year,” Pomeroy said.

While recent mega-earthquakes have heightened the public’s perception of earthquake risks, the CEA believes more needs to be done to make earthquake insurance more valuable, so more people can afford policies – and have a hope of having claims paid when earthquake activity occurs. Although the recent large earthquakes in Chile and Mexico created small spikes in new earthquake insurance policy sales in March and April, policy sales are tapering off, according to agency data.

“We’re not losing policies, even in these tough economic times, but we’re not really gaining much either,” Pomeroy said. “In terms of protecting one’s individual home, one’s main asset in one’s life, California is woefully unprepared for the next big earthquake,” he added, noting there is a 99 percent chance of a 6.7 magnitude or greater earthquake striking California in the next 30 years.

Rewarding Risk Reduction

The Golden State has had earthquake building codes for new construction for some time, but this is the first standard to address earthquake retrofit projects for existing construction. So now that the retrofit standard exists, Pomeroy said the CEA is marshalling funds for a financial incentive rebate program.

“We’re not ready to turn the switch on this yet, but we’re working toward having the ability to, if someone spends $5,000 to $7,000 for example on retrofitting their home, well maybe we can rebate $2,000 to $3,000 or something like that,” he said.

Meanwhile, the CEA is pursuing additional avenues – lobbying Congress and gathering retrofit data – to try to improve the affordability of earthquake insurance policies. “Our goal is to double [the take-up rate] within five years, if we can put some tools in place. It’s an ambitious goal, but it’s a place to start, and we’re working real hard to do that,” Pomeroy said.

On Capitol Hill, the CEA is pushing for legislation that would reduce its reinsurance requirements. “We’re caught in a vicious cycle whereby we want to make coverage more affordable, but in order to have the financial backing to honor policies, we have to buy so much reinsurance,” Pomeroy explained. The high cost of reinsurance is passed onto consumers, resulting in a product that often does not fit consumers’ pocketbooks, at least in high-risk areas, he said.

The key to moving into a better place and reducing the CEA’s heavy reliance on reinsurance would be the ability to borrow funds for a certain amount after a big event, which his group is pushing to change through the Catastrophe Obligation Guarantee Act.

“A federal guarantee would give us a certainty that the private lenders would lend to us, then we could take that certainty and reduce how much we’re spending on reinsurance,” Pomeroy said. The savings, estimated at about $150 million per year, would be passed onto consumers through a more affordable product with lower deductibles.

But given the nation’s preoccupation with other topics, such as health care reform and tax cuts, the CEA is not putting all of its eggs in the federal legislative basket.

“Someday we hope to do something with regard to rate adjustments,” Pomeroy said. “We hope to make the coverage a little more accessible to people after a more likely event by doing some things with respect to the deductibles to allow them to basically recover on some of their content loss, even though their home hasn’t been totally damaged or totally destroyed.”

For instance, the CEA currently offers a 5 percent discount on earthquake insurance policies to people who have successfully completed a mitigation project on their home, but Pomeroy said his agency believes the discount should be greater. Consequently, the CEA is developing a research project to gather data on how much various mitigation steps reduce a structure’s risk. With data to support that certain improvements reduce risk, the CEA then could ask the Department of Insurance to approve a deeper discount for people who have completed mitigation projects.

“Once we do that, we’ve got two things: We can financially incentivize people to mitigate their home, and we can offer them a better discount on their insurance policy once they take that step because they’ve made their home that much stronger and more risk adverse to the threat of an earthquake,” Pomeroy said.

Admitting that those changes are a few years away, Pomeroy encouraged independent insurance agents to make sure customers are aware of the benefits of earthquake insurance. Agents who write for companies that participate with the California Earthquake Authority, he said, can play a big role in:

• Helping to make sure that their customers are adequately prepared;
• Making sure they know that earthquake damage is not covered in the normal homeowner’s policy;
• Making sure that they know the relative risk that we all face every day here in California; and
• Making sure that they don’t have this false impression that the federal government is going to come in and take care of everybody who hasn’t taken the step to adequately prepare themselves.

“We all have to do more to make sure that people are focused on that if they live in California, they understand the earthquake risk,” Pomeroy said.