L.A. 20 years after the big quake – still underinsured

The 6.7 magnitude Northridge earthquake of 1994 shook Los Angeles, damaged more than 40,000 structures and resulted in $12.5 billion in insurance payouts – but 20 years later, Californians remain underinsured for another Northbridge event.

Environmental

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“While the insurance industry is much better prepared to handle high losses than it was in 1994, its current stake in the game is insufficient to protect home and business owners from disastrous financial consequences,” states Kevin Long, a representative of AIR Worldwide.

“The next big earthquake would not only put stresses on the uninsured, but would test the resiliency of lending institutions, local and state governments, and the final backstop — the federal budget.”

According to AIR Worldwide, if the Northbridge earthquake were to recur today, estimated insured losses would total near $24 billion.

It was on January 17, 1994, at 4:31 a.m., PST, a previously unknown blind reverse-thrust fault ruptured nine miles beneath a town called Northridge in the San Fernando Valley. With a magnitude of 6.7 and an epicenter just 20 miles northwest of downtown Los Angeles, it produced the largest ground motions ever recorded in an urban environment in the U.S.

It spurred in the state of California to pass legislation to create the privately funded, publicly managed, not-for-profit California Earthquake Authority (CEA).

The CEA was intended to be a permanent solution to California’s earthquake insurance cover issues, but the percentage of California homeowners who have coverage is currently only about 12 per cent. The CEA bears a little over two-thirds of this risk.

“In contrast to flood coverage,” says Long, “which is required in order to obtain mortgages for properties in flood-prone areas, lenders do not require homeowners to buy earthquake insurance.”

Many homeowners assume that they will not experience a major home-damaging earthquake, and many others are willing to take their chances, given the high deductibles (15 per cent on the value of the structure), states Long. Some assume that the Federal Emergency Management Agency (FEMA) will step in to provide post-disaster assistance, and still others may simply walk away from their mortgages if their properties sustain enough damage, shifting the financial burden to the lending institutions.

According to AIR, the understanding of earthquakes (seismicity, ground motion, and engineering) have improved greatly since the Northridge event. Stakeholders are thus better equipped than ever to test alternate policy conditions, underwriting guidelines, and the impact of mitigation features to develop viable insurance products, and to make better portfolio optimization and reinsurance purchasing decisions.

In addition, the increasing convergence of capital markets with the insurance industry means that there are more (and more innovative) ways to transfer and manage California earthquake risk than ever before.

Earthquake models, still in their infancy 20 years ago, can now provide insight into compelling ways to improve the value proposition of insurance, while keeping short- and long-term financial objectives in mind, Long points out.  
 

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