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The Ridgecrest earthquake: Will recent quakes shake up the California insurance market?

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By David D. Evans, Eric J. Xu, Cody Webb | 19 July 2019

Those of us in California don’t blink when we feel a tremor. But when a big earthquake strikes, people ask questions: Was it the “Big One”? Is the “Big One” coming soon? Such were the questions after Independence Day 2019, when a 6.4 moment magnitude (Mw) earthquake struck Ridgecrest, California, followed closely by a 7.1 Mw event and over 8,900 aftershocks as of July 12, 2019.

Ridgecrest was not the “Big One.” While it was the most powerful California earthquake since 1999, and only the fourth exceeding 7 Mw in the past 40 years in California,1 Ridgecrest occurred in sparsely populated Kern County and won’t rival the state’s most destructive earthquakes. Based on early estimates, expected economic damages from Ridgecrest are at least $1 billion,2 far lower than those from the 1989 Loma Prieta event that shook the San Francisco Bay Area at 6.9 Mw and caused over $6 billion in damage ($12 billion in today’s dollars), or the 1994 Northridge earthquake that struck Greater Los Angeles at 6.7 Mw, with damages as high as $40 billion ($69 billion in today’s dollars).

The Three California Perils

California is often thought of as earthquake country, but it is a three-peril state when it comes to natural catastrophes; it also has significant exposure to wildfires and floods. By comparison, the November 2018 wildfires caused insured losses of over $12 billion as of April 2019,13 an order of magnitude higher than losses expected from Ridgecrest.

Fortunately, wildfire is typically covered by insurance. However, after the major fires of the last two years, carriers may be restricting exposure via nonrenewals and price increases.14 This forces homeowners to purchase coverage through alternative and often more expensive options like the California Fair Access to Insurance Requirements (FAIR) Plan or the surplus lines market, the latter of which has recently experienced significant growth.15 While insurers in California are continuing to cover wildfire losses, and a dramatic reduction in wildfire coverage may not be imminent, insurers have undoubtedly become more cautious with the risk.

Floods, by contrast, similar to earthquakes, are not covered in a standard homeowners policy. Although California is not known for flood risk, it has the potential for devastating inland floods, and could experience a flood of similar magnitude to a major earthquake. In 1862, floods devastated the West Coast, by some estimates destroying over 25% of California’s taxable real estate.16 Furthermore, research on the impacts of climate change in California17 indicates that the risk of a similar flooding event will be more than three times as likely by the end of the 21st century, compared to what it was in preindustrial times.18  

The U.S. Geological Survey (USGS) raised the risk of another high magnitude earthquake shortly following the Ridgecrest event, but the chance of a major aftershock decreases each day. Nevertheless, we are hopeful that Ridgecrest will prompt Californians to consider their exposure to earthquakes, and take action to protect their families and assets. For starters, earthquake kits are an inexpensive necessity for Californians to be prepared. Structural retrofits are another way Californians can fortify their homes, especially in places like the San Francisco Bay Area and Greater Los Angeles, where many homes were built before 1980, an era in which homes were not built to the same seismic specifications as today.

These measures provide invaluable protection, but there’s another that most Californians lack—insurance. Coverage for earthquakes isn’t provided by homeowners policies in California, and the lack of it poses a risk to the largest assets of many state residents: their homes.

A primer on earthquake insurance in California

Today, earthquake insurance is primarily purchased through the California Earthquake Authority (CEA), an association, sanctioned by law, that insurers formed after Northridge. Since the 1980s, California law has required that earthquake coverage be offered with homeowners polices. After the destruction caused by Northridge, many homeowners insurers reduced their exposure to earthquake and stopped writing new homeowners business entirely, leading to major disruption in the insurance market.3 The CEA was formed so homeowners insurance could be sold along with the mandatory offer of earthquake coverage, without individual insurers bearing the catastrophe exposure.

Annually, the CEA writes over 1 million earthquake policies,4 which seems like a large number until compared against California’s 14 million housing units.5 Combined with only half a million policies insured by the private market, a meager 10% of residential units in the state possess earthquake insurance.

One reason for the low participation rate is simply the cost. Earthquake premiums are generally intended to match the risk, so those in risky areas won’t find it cheap; annual earthquake premiums in San Francisco, through which the San Andreas Fault runs, ranges from $2,000 to $5,000 for a 1,400-square-foot home.6 Nevertheless, the protection may be worth the price.

What is the actual risk?

To understand the susceptibility of California residents to earthquake, we overlaid measures of shaking potential to actual locations of California residences, and compared this to the rate at which they purchase insurance. Shaking potential was based on a study by the California Geological Survey and the USGS,7 insurance participation rates were provided by the California Department of Insurance (CDI),8 and the locations of residences were obtained from Milliman’s “market basket,” a cross-sectional data set that we use to represent housing stock and estimate its exposure to catastrophic perils.

Figure 1: Earthquake Risk and Insurance Participation Rate in Key Areas

  Homeowners Policies9 Percent of Homes
Area Total With Earthquake Insurance Shaking Potential Higher than Ridgecrest Epicenter With Earthquake Insurance
Los Angeles County10 1,147,827 241,576 98% 21%
San Diego County 484,669 109,340 6% 23%
Orange County 452,770 97,166 68% 21%
Riverside County 413,919 37,439 86% 9%
San Bernardino County 340,359 26,523 92% 8%
Sacramento County 296,332 10,769 0% 4%
Santa Clara County 292,365 36,708 100% 13%
Alameda County 256,342 32,138 100% 13%
Contra Costa County 227,853 18,536 96% 8%
Fresno County 151,308 5,198 1% 3%
Greater Los Angeles11 2,501,807 435,873 90% 17%
San Francisco Bay Area 1,264,128 148,022 94% 12%
Sacramento Metro Area 543,372 22,944 2% 4%
San Diego 484,669 109,340 6% 23%
Statewide Total 5,961,911 814,387 61% 14%

Though it experienced one of the most powerful earthquakes in state history, the Ridgecrest epicenter wasn’t particularly exposed. Statewide, we estimate that 61% of single family homes have a shaking potential at least as high; locally, 94% of homes in the San Francisco Bay Area and 90% in Greater Los Angeles have shaking potentials at least as high as the Ridgecrest epicenter. Despite the high risk in these areas, the participation rate of earthquake insurance is similar to the statewide average. The state’s other major metropolitan areas, San Diego and Sacramento, both have far lower exposure to shaking. However, earthquake insurance is more prevalent in the San Diego area, with 23% as many earthquake policies sold as homeowners policies.

Figure 2: Shake Potential for California’s Largest Metropolitan Areas:12

 
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If an earthquake similar to Ridgecrest occurred near a more populated area, as it clearly could, households without insurance could be left without much besides the rubble where their homes used to stand. Additionally, it might be presumptuous to expect significant federal help for these households. With the culmination of the costs of reconstruction, additional living expenses, and outstanding mortgages, uninsured homeowners could be forced into foreclosure, and ultimately forfeit years of accumulated home equity. With nearly 90% of housing units statewide without earthquake insurance, Californians may want to ask the real question: Are we ready for the "Big One"?

1See the NOAA Significant Earthquake Database for more information, available at https://www.ngdc.noaa.gov/nndc/struts/form?t=101650&s=1&d=1.

2USGS (July 12, 2019). Update: Magnitude 7.1 Earthquake in Southern California. Retrieved July 18, 2019, from https://www.usgs.gov/news/update-magnitude-71-earthquake-southern-california?qt-news_science_products=7#qt-news_science_products.

3CEA. History of the California Earthquake Authority (CEA). Retrieved July 18, 2019, from https://www.earthquakeauthority.com/About-CEA/CEA-History.

4CEA (August 1, 2018). Annual Report to the Legislature and the California Insurance Commissioner on CEA Program Operations, 2017. Retrieved July 18, 2019, from https://www.earthquakeauthority.com/About-CEA/%E2%80%8BAnnual-Legislative-Reports/Annual/Annual-Report-to-Legislature-Report-Year-2017.

5U.S. Census Bureau. QuickFacts, California: Housing Units, July 1, 2018 (V2018). Retrieved July 18, 2019, from https://www.census.gov/quickfacts/fact/table/CA/HSG010218#HSG010218.

6Boyer, M.A. Is earthquake insurance worth the cost? United Policyholders. Retrieved July 18, 2019, from https://www.uphelp.org/earthquake-insurance-worth-cost-0.

7Branum, D. et al. Earthquake Shaking Potential for California, 2016. California Geological Survey and USGS. Retrieved July 18, 2019, from https://www.conservation.ca.gov/cgs/Documents/MS_48.pdf.

8California Department of Insurance. Fire and Earthquake Policy Count per County as of December 31, 2017. Retrieved July 18, 2019, from https://www.insurance.ca.gov/0400-news/0200-studies-reports/0250-homeowners-study/upload/C-Policy-Count-by-County-2_v1.pdf.

9Includes primary residences and excludes other types of policies such as dwelling, fire, or renters policies.

10Counties shown are top 10 counties in terms of number of homeowners insurance policies sold.

11Major metropolitan areas have been defined as follows:

  • Greater Los Angeles includes Los Angeles, Orange, Riverside, San Bernardino, and Ventura counties.
  • San Francisco Bay Area includes Santa Clara, Alameda, Contra Costa, San Mateo, Sonoma, Solano, San Francisco, Marin, and Napa counties.
  • Sacramento Metro Area Includes Sacramento, Placer, El Dorado, Yolo, Nevada, Sutter, and Yuba counties.
  • San Diego includes San Diego County.

12The shaking potential is calculated as the level of ground motion that has a 2% chance of being exceeded in 50 years. The scale has been normalized to a level of 1.0.

13California Department of Insurance (May 8, 2019). Wildfire insurance losses from November 2018 top $12 billion. Press release. Retrieved July 18, 2019, from http://www.insurance.ca.gov/0400-news/0100-press-releases/2019/release041-19.cfm.

14Adriano, L. (July 23, 2018). Liberty Mutual, other insurers start dropping risky clients. Insurance Business. Retrieved July 18, 2019, from https://www.insurancebusinessmag.com/us/news/catastrophe/liberty-mutual-other-insurers-start-dropping-risky-clients-106678.aspx.

15Jergler, D. (April 23, 2019). California wildfires helped drive homeowners premium volume in surplus lines. Insurance Journal. Retrieved July 18, 2019, from https://www.insurancejournal.com/news/west/2019/04/23/524563.htm.

16Brewer, William H. (1930). Up and down California in 1860-1864. New Haven: Yale University Press, p. 243. Retrieved July 18, 2019 from https://www.loc.gov/item/30029264/.

17Swain et al. Increasing precipitation volatility in twenty-first-century California.

18Irfan, U. (April 24, 2018). California's droughts and deluges are a sign of the weather "whiplash" to come. Vox. Retrieved July 18, 2019, from https://www.vox.com/2018/4/24/17270340/california-rain-drought-flooding-climate-change.