Earthquakes: Risk and Insurance Issues
An earthquake is a sudden and rapid shaking of the earth caused by the breaking and shifting of rock beneath the earth’s surface. This shaking can sometimes trigger landslides, avalanches, flash floods, fires, and tsunamis. Unlike other natural disasters such as hurricanes, there are no specific seasons for earthquakes. Earthquakes in the United States are not covered under standard homeowners or business insurance policies. Coverage is usually available for earthquake damage in the form of an endorsement to a home or business insurance policy.
However, insurers that do not sell earthquake insurance may still be impacted by these catastrophes due to losses from fire following a quake. These losses could involve claims for business interruption and additional living expenses as well. Cars and other vehicles are covered for earthquake damage under the comprehensive part of the auto insurance policy. In the United States, about 5,000 quakes strike each year. Since 1900, earthquakes have occurred in 39 states and caused damage in all 50. One of the worst catastrophes in U.S. history, the San Francisco Earthquake of 1906, would have caused insured losses of $96 billion, was the quake to hit under current economic and demographic conditions, according to AIR Worldwide. The potential cost of earthquakes has been growing because of increasing urban development in seismically active areas and the vulnerability of older buildings, which may not have been built or upgraded to current building codes. The Northridge earthquake, which struck Southern California on January 17, 1994, was the most costly quake in U.S. history, causing an estimated $20 billion in total property damage, including $12.5 billion in insured losses. In its wake, the California Earthquake Authority (CEA) was created in 1996. Fearing insolvency from another massive earthquake, the vast majority of insurers in the state’s homeowners insurance market had severely restricted or ceased writing coverage altogether after Northridge. To ensure the availability of homeowners coverage and end a serious threat to the vitality of the state’s housing market, the California Legislature established the CEA as a publicly managed, largely privately funded entity. Only about 12 percent of Californians now purchase earthquake coverage, down from about 30 percent in 1996 when the devastating 1994 Northridge quake was still fresh in people’s minds. To encourage more Californians to buy the coverage, the CEA, approved an average 22 percent rate cut, which went into effect July 1, 2006. The CEA says that a sharp drop in the cost of reinsurance and several years without a major quake, allowing the build up reserves, made the cut possible.
Losses from Major Recent Earthquakes:
At the beginning of 2010 there were two major earthquakes: a 7.0 magnitude quake in Haiti in January and an 8.8 magnitude quake in Chile in February. The Haiti quake killed over 220,000 people and caused $8 billion dollars in damages, most of it uninsured. The Chile quake, though more powerful, was far less deadly as its epicenter was located in a region with relatively low population density and because Chile’s history of damaging quakes has led to strict building codes. The Chile quake and its associated tsunami caused over $4 billion in insured losses and more than $20 billion in total damages (including insured and uninsured losses), according to Munich Re. It caused about 500 deaths.