Rising Earthquake Risks and Oklahoma’s Insurance Market

The 5.0 magnitude earthquake that struck near the oil and gas storage hub of Cushing, Oklahoma, on Nov. 6 put the nation on alert to the vulnerability of the country’s oil reserves to the significant increase in seismic activity in the state over the past several years.

Cushing, about 50 miles northeast of Oklahoma City, is home to one of the largest oil storage terminals in the world. No damage was reported to the infrastructure and pipelines that serve the oil trading hub immediately after the quake struck, but some 40 to 50 buildings in the town of Cushing were reported to have been significantly damaged.

In recent years, the number of earthquakes measuring 3.0 magnitude or larger in Oklahoma has grown significantly — from just two in 2008 to around 900 in 2015. Scientists have linked the increase to the underground disposal of wastewater from oil and gas production.

The Cushing quake followed a week of high earthquake activity in Oklahoma — nearly two dozen temblors were recorded during that time period, including a 4.5 magnitude quake near Pawnee where the state’s largest recorded earthquake — 5.8 magnitude — struck in September.

The Pawnee earthquake Oklahoma on Sept. 3 was somewhat surprising not only because it was the state’s largest recorded temblor to date, it also struck an area thought to be only moderately vulnerable to seismic activity.

The spike in earthquakes, especially those of magnitudes higher than 4.0, brings into question what impact they are having on the earthquake insurance market in Oklahoma.

Earthquakes are not covered by most residential and commercial property policies and the percentage of Oklahomans securing separate coverage for seismic events is relatively low — around 10 to 15 percent. However, the rate is up from around 2 percent in 2011, according to the Oklahoma Insurance Department (OID).

“There has been an increase in earthquake coverage over the last few years — above the average in California. The education track in Oklahoma has helped,” said Insurance Commissioner John Doak, whose agency has made it a priority to increase the awareness of both insurance agents and consumers on the details of earthquake insurance.

There are more than 100 insurance companies offering the coverage in the state but four of them together hold 55 percent of the market share, data released by OID in May shows.

Doak said “a delicate balance” is required to keep the cost of earthquake insurance low, while continuing to foster a healthy market for the coverage. He added that “the department is monitoring significant rate increases and … is taking measures to deter excessive increases.”

Jack Coleman, with Midlands Management Corp., an insurance wholesaler that operates in Arkansas, Oklahoma and Texas, said the market is in somewhat of a “turmoil right now. With some companies making a little bit of an exit if you will and making changes to their policy forms, exclusions or increased premium and increased deductibles, things of that nature. Verifying or making it clear that man-made type incidents are not covered.”

He added, however, that he has seen some markets “taking a different approach, similar to what we are, trying to be a bit more accommodating or being very clear as to what their coverage lines are. …. A long story short, there’s just a lot of confusion right now.”

Most earthquake coverage is written as an endorsement to the property policy. Stand-alone coverage is available but more expensive, said Denise Johnson, executive director of the Independent Insurance Agents of Oklahoma (IIAOK).

Coverage is available and consumers will have no problem finding it, Johnson said. “It’s just — what level of coverage do they want, do they want a high deductible, what do they want in premium? Do they want a large coverage? Obviously, they’re going to have to pay for it. So, I don’t think there’s any problem finding the coverage; it’s just what do they want to pay for it and what do they want the coverage to be?”

In the aftermath of the Pawnee quake in September, “our submission count has gone up at least 15 times of what we normally see. And we have a fairly active earthquake program,” Coleman said.

One major problem with the coverage in Oklahoma is that deductibles are high and because the magnitudes of quakes occurring in the state have been relatively low, the damage costs incurred are often less than the deductible.

“The deductibles are high and not well suited to Oklahoma, which has a frequency problem, not severity,” Commissioner Doak said. “Someone that has experienced 800 earthquakes with 3.0 magnitude and under has different issues than someone who has a 6.2 or 6.5 mag quake.”

Coleman confirmed that deductibles are one of the largest concerns for Midlands’ residential customers. “Having an average of 10 percent on earthquake with a sublimit on their homeowners policies was pretty difficult, especially with many of our folks with low to middle income type households. So, for us it was the deductible that drove us to be more creative with our program.”

He believes Midlands, which serves both residential and commercial customers with the coverage, can be “more competitive because we have a small deductible, or deductible options.”

In a report released in September, the global reinsurer Swiss Re recognized that because “deductibles are typically applied to each individual event, small to medium repeated events can build up sizeable uncovered damages over time. The cost to repair these damages can be a large financial burden to many homeowners and businesses.”

The reinsurer suggested that insurance companies could create “a more meaningful product” for the type of earthquake risk that exists in Oklahoma, such as “a product that incorporates an aggregate cover for those suffering multiple small losses.” Insurers might also consider decreased deductibles and limits, the report said.

By early November, only 274 damage claims had been filed over damage from the Pawnee quake, and only four claims — worth $24,232 — had been paid, the Associated Press reported. Of the claims filed with the insurance department, 39 were closed without payment, 17 were denied, two were being investigated and 212 are still open, according to the AP.

Coleman said his company’s claims experience from the Pawnee quake has been light.

“We do work our own claims, most of what we’ve seen so far has been fairly superficial. Some brick veneer issues, some drywall issues. We’re happy so far … happy for our insureds not having that much damage,” he said. But, “we had claims all the way down to Norman from that quake. So, it shook us pretty hard in Oklahoma, all the way across the board,” he added.

In Oklahoma, we have a “moderate, low and high severity county area. … Pawnee falls in that moderate area; it really didn’t fall in that high-risk area. That kind of changed the game a bit for a lot of folks,” Coleman said.

Doak said he toured the area personally after the Pawnee quake and thought most of the damage costs might be under the deductible.

“I haven’t seen homes or commercial buildings on the ground or uninhabitable,” he said. However, “insureds may be filing claims and they don’t know that the claims are less than the deductible.”

With location a dominant factor in underwriting earthquake risks, it is important to note that 94 percent of the seismic activity has traditionally occurred in 10 Oklahoma counties — Garfield, Grant, Logan, Major, Noble, Pawnee, Payne, Woods and Woodward, according to the OID.

Along with location, the age and construction of the building are primary factors in underwriting for earthquake risks.

“Obviously, location is a big thing. That mainly is it for us — what year it’s built, whether it’s a primary residence or a rental. Those don’t really drive the rate for us but it is part of our underwriting criteria,” Coleman said.

“For some of those folks that are living in higher risk areas, we needed more aggregate. We looked for the ability with our partners to put more aggregate in those high-risk zones,” Coleman said.

Doak is a big proponent of construction techniques that serve to mitigate damage not only from earthquakes but other natural disasters as well, such as the tornadoes that pound the state year after year.

“Building codes are a major issue not only in Oklahoma but across the United States,” Doak said.

He believes the Fortified Home standards developed by the Insurance Institute for Business & Home Safety (IBHS) are a good place to start.

Following the tornado that devastated Moore, Okla., in May 2011 that city “beefed up its building codes,” Doak said. “That needs to be done across the state.”

The commissioner added that he would be working with the legislature on creating minimum statewide building codes.

Coleman said building codes could affect the market going forward. As cities look at establishing new codes and they “come into play we’re going to be looking at it from a claims standpoint,” he said.

The IIAOK’s Johnson said greater acceptance of building to IBHS standards could be influenced by insurance markets.

“We really feel that … for houses with that standard, the market will take care of it,” she said. “If markets would really look at it and give discounts for those standards, I think people would be more inclined to raise the standard of their home or build new homes with that standard.”