2,000 CEA policyholders exposed to M 6.4 California earthquake

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As many as 2,000 policyholders of earthquake insurance coverage provided by the California Earthquake Authority (CEA) were exposed to yesterday’s magnitude 6.4 quake near Ridgecrest, California, but the event could have cost billions had it struck a more densely populated area.

parametric-earthquake-insuranceYesterday’s quake was the strongest to strike southern California in two decades, but damage and costs appear to have been limited due to the relatively sparsely populated region it hit.

The quake was felt as far away as Los Angeles and Las Vegas, but the epicentre of the 6.4 magnitude earthquake was near the city of Ridgecrest, around 150 miles (240 km) north-east of Los Angeles.

Localised damage has been reported and it’s likely the California Earthquake Authority (CEA) will receive some claims, as too may private insurers that provide any quake protection to homes or commercial buildings in the area.

CEO of the CEA Glenn Pomeroy commented, “This event is an important reminder that all of California is earthquake country. Earthquakes can happen at any time—a magnitude 5.6 earthquake occurred on our northern coast just a couple of weeks ago—and we need to be prepared. It’s important to know what to do to stay safe when the ground starts shaking—drop, cover and hold on!—and to take other steps to prepare to survive and recover from damaging earthquakes, such as to retrofit homes built prior to 1980 and the advent of modern building codes, which may be more vulnerable to earthquake damage, and consider earthquake insurance to protect ourselves financially.”

He continued, explaining that, “If this earthquake had occurred under a densely populated area, it is likely that California would be looking at many more injuries and at damages in the billions of dollars.”

The CEA said that around 2,000 of its quake insurance policyholders in the region affected likely experienced strong shaking.

However, the CEA if well-prepared, thanks to its financial buffers and reinsurance capacity, including that which it sources from the capital markets in catastrophe bond form.

Pomeroy said, “Any damage to their homes would be considered well within CEA’s claim-paying capacity for covered claims. (CEA has more than $17 billion in claim-paying capacity—enough to cover claims from a reoccurrence of the 1906 San Francisco, 1989 Loma Prieta or 1994 Northridge earthquake.)”

In this case it seems the damages will not be all that impactful to the CEA’s finances. The USGS gave yesterday’s earthquake only a 21% chance of causing economic damages of above $100 million and just a 6% chance that the cost would exceed $1 billion.

California may be well-prepared thanks to reinsurance capital sources by the CEA, but earthquake insurance penetration remains woefully low in the state.

The percentage of California homes covered by quake insurance is as low as 12% currently, which means any significant earthquake event in a densely populated area could create billions in uninsured losses and fall to the state and taxpayers to pay for.

Yesterday’s event should serve as a warning to homeowners and commercial businesses operating in the state that insurance to protect themselves against disaster would be a prudent idea.

There’s plenty of reinsurance and alternative capital to support significantly higher penetration of quake insurance in California and that would make recovery after the next really impactful earthquake a much swifter and well-supported process for people, businesses and the state itself.

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