Out and About: Earthquake insurance for CA residents

In October, Consumer Action’s Audrey Perrott attended leading global reinsurer Swiss Re’s California Earthquake Symposium along with stakeholders representing government; reinsurers and insurers; behavioral economists; representatives of the science and engineering fields; academics and consumers. (Re-insurers are companies that provide financial protection to insurance companies in the event that covered insurers face excessive claims due to large disasters.) The symposium featured presentations from many of the aforementioned industry players, who addressed the challenges in educating California consumers on the importance and affordability of earthquake insurance.

Standard homeowners and renters insurance does not cover earthquake damage. Earthquake coverage is available in the form of a separate policy or an endorsement from most private insurers and, in California, the California Earthquake Authority (CEA).

Audrey Perrott represented the consumer perspective in a roundtable discussion with other advocates.

Although earthquakes are extremely common in California, most Californians do not have earthquake insurance. According to the California Earthquake Authority, most Californians live within 30 miles of an active fault capable of producing a damaging earthquake. What’s more, the Uniform California Earthquake Rupture Forecast (UCERF3) predicts that within the next 30 years there is a:

• 99.7 percent chance that a 6.7 magnitude (M) quake or larger will strike California
• 46 percent chance a 7.5M or greater earthquake will strike, likely in Southern California
• 68 percent chance a 7.0M quake will happen in Northern California

Glen Pomeroy, CEO of CEA, said that despite this fact, 90 percent of homes in California are uninsured for earthquakes. There are a number of reasons that Californians do not have high “take-up rates” (industry jargon for the percentage of eligible people who have earthquake insurance). Some of those reasons include: a lack of awareness of the risks; the misconception that the standard homeowners or renters policy will cover earthquake damage; a belief that the government will provide assistance; a belief that one’s landlord will cover personal property damage (for renters or condominium owners) and/or a belief that the high insurance premiums and deductibles are not worth the investment.

“California consumers should rethink the decision not to have earthquake insurance, because a significant number of consumers cannot afford to pay out of pocket for property losses or relocation costs after a disaster,” Perrott said. “There is this huge misconception that the government will cover the tab for any natural disaster; however, funding is limited, if available at all. In most instances, government grants cover basic emergency needs and not the cost to rebuild the home to its original condition.”

Renters and Millennials are two of the largest populations without earthquake coverage, likely due to a lack of awareness. Unfortunately, they could pay dearly if their apartment building is deemed uninhabitable post-earthquake, as uninsured renters are expected to cover their own relocation costs.

So what about the premiums and deductibles? Are they really that expensive? While premiums and deductibles may seem intimidating or cost-prohibitive, consumers do have options. As of January 2016, the CEA and its member insurance companies have rolled out new policy options and deductible choices. Consumers have the option to cover personal belongings or omit that from their earthquake coverage. They also have the option of selecting higher deductible options, all of which can help them cut costs. (Consumers often believe that they have to pay the deductible out of pocket, but they don’t because the deductible is subtracted from the claim payment.)

According to Perrott, there were many eye-opening takeaways from the symposium. First, attendees acknowledged that increasing take-up rates would require complex public education and outreach efforts. Stakeholders also recognized the need for uniform training of agents that serve limited English proficient communities, as well as the creation of educational and insurance policy materials in languages other than English to reflect the changing demographics in California. Many stakeholders agreed that, in order to encourage homebuyers and renters to purchase earthquake insurance, coverage options should be provided to them unless they specifically “opt out.” It was suggested that the government also consider offering incentives in the form of rebates or tax breaks for those who have earthquake policies. Finally, some see a dire need for new insurance products to encourage more people to buy coverage.

If you are wondering what next steps you can take as an individual consumer, download Consumer Action’s insurance checkup publication. Consumer Action encourages consumers to stay adequately insured and to reassess their insurance needs annually based on life changes. Finally, if you want to gauge your specific earthquake risk, you can do so through an app called Temblor, available online and through the Android and iTunes app stores.