Eyeing insurance rates as quakes rattle state
This has been a busy month for Glenn Pomeroy, chief executive of the California Earthquake Authority.
On July 1, the quakeinsurance provider revised rates for the first time in three years, raising them for some policyholders and lowering them for others. On July 4 and 5, a pair of powerful earthquakes hit Southern California, sending Pomeroy south to survey the damage. On Friday, Gov. Gavin Newsom signed a bill that puts the authority temporarily in charge of a new $21 billion wildfire insurance fund.
I caught up with California’s master of disaster this week to talk about quakes, rates and his new role with the soontobecreated wildfire fund.
The authority is a publicly managed, privately funded, notforprofit organization that sells residential earthquake coverage to people who have homeowner or renter policies with participating insurance companies. Premiums are based on a home’s age, type of construction, location, number of stories, retrofit measures, coverage limits, deductibles and policy upgrades.
The authority changes rates periodically in response to new earthquake science and other factors. It got permission to revise rates on July 1, 2019, 2020
and 2021, based largely on rising construction costs and the third Uniform California Earthquake Rupture Forecast, which came out in 2014.
Compared with the second forecast, it found a smaller chance of moderate earthquakes (magnitude 6.5 to 7.5), but a larger chance of bigger quakes. This is based on a better understanding that quakes are not confined to individual faults, but can sometimes rupture multiple faults simultaneously, causing far more damage.
The forecast said the Los Angeles area has the state’s greatest risk of a big one because it has more faults that could host a multifault rupture. In Northern California, it found more risk on the HaywardRodgers Creek and Calaveras faults than on the Northern San Andreas Fault. On Tuesday afternoon, two small earthquakes between Blackhawk and Brentwood jolted the East Bay.
This year, about threefourths of the authority’s policyholders will see no change or a rate decrease and 25% will get an increase. At the end of the threeyear period, rates overall will be down by 1.7%. Homeowners with multiple risk factors could see their rates double or triple, Pomeroy said.
For policyholders with homes built before 1980 who got a 20% or greater increase, the authority is offering a limited number of $3,000 grants for retrofitting and — if they verify the work — a premium discount up to 25%.
Only 13.3% of California homeowners had earthquake coverage in 2017; the authority accounted for twothirds of those, according to the California Department of Insurance. Today, the authority has about 1.06 million policies, up from 1.02 million in 2017.
“We have $17 billion in claimspaying capacity, of which $6 billion is capital. The rest is reinsurance and other tools,” Pomeroy said. “There is only a 1in400 chance we will have a quake that exceeds our claimspaying ability,” he added. If that happened, it would prorate claims.
The authority is in good financial shape because California has not had a catastrophic quake since it was created by the Legislature in 1996. The event triggering its largest combined payout, $3.8 million, was the 2014 Napa quake.
When Pomeroy traveled to Southern California after the 6.4 and 7.1 quakes on July 4 and 5, he was surprised to see relatively little visible property damage, except in some mobile home parks. Most homes in the area are newer, singlestory residences on a slab with light roofs.
The authority has about 2,000 policies in the areas where strong shaking occurred. In Ridgecrest (Kern County), which includes a large military base, about 20% of homes have coverage. It has received only a couple of hundred claims from the area, but expects more. “My suspicion is that most (claims) will be for interior damage or maybe contents loss,” Pomeroy said.
After those quakes, the Insurance Department got calls about an “alleged moratorium” on sales of new quake policies in certain parts of the state. Last week, it issued a press release to “dispel confusion.” Quoting Pomeroy, it said: “CEA policies can be purchased anywhere in California, at any time, and by anyone who has a home insurance policy with one of our participating insurers. However, for new policies purchased after an event, we do not provide coverage for the next 360 hours, or 15 days, for earthquakes that are seismically related to the initial event.”
Some Californians could also be confused by the creation of the new wildfire insurance fund, which is not insurance in the traditional sense. And, unlike the earthquake authority, it’s not regulated by the Insurance Department.
The $21 billion wildfire fund will reimburse the state’s investorowned utilities for “reasonable” legal judgments and settlements they pay to victims of future wildfires caused by their equipment. This assumes the utilities join the fund, put up half the money and meet other requirements.
The state will name an administrator to run the fund and create a new California Catastrophe Response Council to oversee the fund’s administrator.
Under AB111, the earthquake authority will act as the wildfire fund’s administrator until a permanent one is named. And the board that oversees the earthquake authority will also act as the catastrophe council until a majority of its members have been appointed.
The earthquake authority’s board includes the governor, state treasurer, insurance commissioner and two nonvoting members from the Legislature. The governor, treasurer and insurance commissioner will also serve on the ninemember catastrophe council.
The earthquake authority also could provide support services to the fund on an ongoing basis, for a fee. These could include investment management and purchasing reinsurance, since it has experience in those areas. The council would oversee these services.
Pomeroy said he was not involved in the legislation that created the fund or its companion bill, AB111. But, he said, “I commend everyone who has obviously worked very hard pulling together this complex, comprehensive solution to a very difficult problem California is facing.”