Earthquakes: The $200 Billion Risk

The rise of natural disasters in the United States is prompting inquiries into insurance coverage options.

Insurance News


It happened again over the weekend: Sunday's magnitude-6.0 earthquake rocked nearby Napa, California and may have caused between $500 million and $1 billion in insured losses, according to catastrophe modeling firm Eqecat Inc.

Separate business interruption and contents losses, still being counted, could mean insured losses total more than $1 billion, Eqecat added.

Earthquakes are not particularly unusual in the state; the US Geological Survey says annually there are 10,000 quakes, mostly too small to be felt; but those measuring over 4.0 account for only about 0.2% of them.

And though losses this weekend were steep, an earthquake in a highly populated area could cause up to $200 billion of damage according to the Federal Emergency Management Agency. While some areas are more vulnerable, nowhere in the US is immune.

Most recently, apart from California, Oklahoma has been one of nature’s targets and for insurers it represents both risk, and opportunity. Mike Kahn, co-owner at Lynnae Insurance in Oklahoma City says he’s definitely seen increased inquiry levels:

“In our first 10 years in business, I remember adding earthquake insurance to 2 policies, but in the past 10 months we ran over 250 quotes for this coverage," Kahn said.

The firm has been quick to grasp social media in promoting front-of-mind products, using YouTube videos to explain the benefits of earthquake cover.

So what’s best; an endorsement or a separate policy? Kahn says that endorsements can work fine and come in at around half the cost of a separate policy, but often with many exclusions and a higher deductible. He says “Whether it is a policy or an endorsement is not as much concern as the quality of the policy.”

Over on the west coast, earthquake insurance is dominated by the California Earthquake Authority (CEA), whose member companies currently have 850,000 policies in force in the state, around 70% of the total. Under California law, a separate earthquake policy is required to be offered when homeowners insurance is sold.

Sheri Aguirre of the CEA says that the benefits certainly outweigh the cost: “While earthquakes are infrequent events, they are capable of producing catastrophic loss. An earthquake insurance policy provides coverage for the replacement cost of a home subject to a 10 or 15% deductible.”

Although homeowners seem to be keen to protect their potential losses from one of nature’s most powerful forces, businesses clearly do not share their concerns. According to the most recent data from the California Department of Insurance, fewer than 10% of commercial policies also have earthquake cover; while in Oklahoma, Mike Kahn told Insurance Business: “Without question most inquiries are coming from homeowners concerned about their property. For some reason businesses have not been too concerned about it.”

As environmental risks continue to grow it’s likely that the level of homeowners buying earthquake cover will increase, and eventually, businesses will surely follow suit.

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