Earthquake Insurance Sales Spiked in 2017

For years, scientists have warned that we are due for a major earthquake. But getting Californians to buy earthquake insurance was a difficult sell — only around 10 percent of households in the state have it.

Then came the natural disasters of 2017. Glenn Pomeroy, chief executive of the California Earthquake Authority, the nonprofit organization that oversees the insurance program, says that fires and mudslides in California, the flooding in Houston, and the earthquakes in Mexico all helped persuade many more Californians to sign up.

Last year, the earthquake authority saw a record increase of 90,000 new customers, compared with an average annual increase of 7,000 over the previous decade.

The “horrible run of natural catastrophes,” Pomeroy said in an interview, “crystallized people’s thinking about the need to be protected.”

Also helping lure new customers were more aggressive advertising by the authority and the introduction of new offerings, including lowering the minimum deductible to 5 percent of a home’s value, from 10 percent.

All of this would seem to be good news for California — more people insured presumably means a steadier recovery after an earthquake.

Yet the increase came with unintended consequences. For reasons related to the way the earthquake authority is capitalized, the sharp increase in customers means the authority has to buy more reinsurance — the insurance that insurance companies buy for themselves to spread risk. This means the authority will be forced to raise rates around 2 to 4 percent annually, according to Pomeroy.

“We are on the horns of a dilemma,” Pomeroy said. “If we keep growing at rates that we are now growing, there’s going to come a day when we are going to have to start raising rates to the point where it will then become unaffordable again.”

Last month in a speech to the authority’s governing board, Pomeroy sketched out an idea for a “backstop” that would impose an “extremely small” assessment on all Californian homeowners with insurance, not just those with earthquake insurance, in the case of a very large earthquake. That would help bring rates down, he said. He plans to make the case to the state Legislature soon.