In 1999 and 2000, there wasn't much shaking going on in California. But even when it's quiet, arguably the greatest peril facing those who live, work and play in the Golden State is earthquakes. Their unpredictable nature and often damaging power make them a force that residents struggle to understand and control. As California's population continues to increase and its industries expand, especially in the high-tech arena, the potential for a devastating earthquake to wreak havoc on the state's economy looms ever larger.
In the wake of the 1994 Northridge earthquake, which registered 6.7 on the Richter scale and caused more than $12.5 billion in insured losses, both insurers and state administrators were concerned that further earthquake losses would exhaust insurers' reserves and jeopardize their financial stability. This concern was well founded; after Northridge, one estimate indicates that 93% of insurers either restricted their writings or pulled out of California altogether.
Emblematic of Northridge's impact on the market was the massive losses incurred by 20th Century Insurance. A leading writer of homeowners and earthquake insurance in California, 20th Century was one of the hardest hit insurers and had the heaviest concentration of policies in the area affected by the Northridge quake. The insurer was unable to pay claims and in 1994 was removed from the homeowners and earthquake market by the state insurance department. In 1998, the American International Group acquired a majority interest in 20th Century, and in 1999, the company was allowed to reenter the market when it agreed to the establishment of a $6 million fund to augment its efforts to pay out more than $1 billion in settlement of its Northridge claims.
Restoring stability
In an effort to restore stability to the earthquake insurance market, the California Earthquake Authority (CEA) was established in 1996 as a vehicle through which insurers could offer earthquake coverage for homes, condominiums, mobile homes and other personal property exposures.
Since the early 1980s, homeowners carriers in California have been required by law to offer earthquake coverage to their policyholders. Participation in the CEA, however, is voluntary. Member insurers sell the CEA earthquake mini-policy to comply with the California offer law. Created by the California legislature, the mini-policy is designed for catastrophic events and is not intended to cover smaller earthquake-related losses. The purpose of the mini-policy is to put a home owner back in his/her residence after a major quake (7.0 or larger as defined by the U.S. Geological Survey). The average annual rate for CEA's earthquake coverage is $2.79 per $1,000 of protection.
Funds to pay claims are provided by premiums, contributions from and assessments on member insurers, borrowed funds, reinsurance and the return on invested funds. No public funds are used. CEA operates as a privately financed, publicly managed organization.
If an earthquake causes insured damage greater than the CEA's claims-paying capacity, policyholders will receive a prorated portion of their covered losses. Prorated claims are calculated based on the total amount of expected claims compared to the remaining available funds.
"The concept of the CEA is a pool of risk sharing, a number of levels of financing, line of credit, reinsurance contracts and assessments on member companies," explains Mark Leonard, CEA's public affairs coordinator. "Its claims-paying ability is well in excess of established capital."
The CEA's leading participants are three of the state's largest homeowners carriers: State Farm, Farmers, and Allstate. For the year 2000, the CEA had more than $7.2 billion available to pay claims.
The California Department of Insurance reports that the CEA posted earthquake written premium of $417.5 million in 1999, representing about 52% of the state's total earthquake written premium of $798.4 million. Earned premium was $406.4 million, and incurred losses in 1999 were only $756,624, producing a highly profitable 0.19% loss ratio for the CEA.
Balancing priorities
Last October, the California legislature and state congressional representatives defeated an effort in Congress to make it mandatory for local and state government entities to insure public buildings against natural disasters.
Opponents said such a mandate could become an economic disaster for California taxpayers. Others called for public entities to invest in pre-disaster mitigation to assure lives are not lost and property is not destroyed or damaged as the result of natural disasters in California.
The Federal Emergency Management Agency (FEMA) and Republican Senators Christopher Bond of Missouri and James Inhofe of Oklahoma had backed the proposed mandate. They argued that disaster recovery efforts and the repair of public buildings cost the federal government increasing amounts of money each time a disaster occurs. They claimed that requiring local and state entities to purchase private coverage for the buildings would reduce the strain on federal funds. After the vote, a compromise bill was introduced with the insurance portion of the proposal dropped.
FEMA reported that nearly two thirds of the comments it received about the proposed regulation were from California. Much of the input indicated that money spent on insurance premiums would reduce the funds available for seismic retrofits, or that coverage was unavailable or too costly.
Earthquake shakes high desert
California's largest recent earthquake (at press time) was on October 16, 1999. Fortunately, it was centered in a remote, virtually uninhabited area of the eastern Mojave Desert and did not cause damage to a large, densely populated area. The 7.0 magnitude quake was felt throughout southern California; the epicenter was approximately 100 miles east of downtown Los Angeles. The so-called Hector Mine earthquake caused power outages, water main breaks, and other damage and was felt as far south as Mexico, as far east as Las Vegas and Phoenix, and as far north as Modesto, California.
This was the first large quake to occur after the installation of new computerized earthquake monitoring instrumentation that should allow seismologists and geologists to gain further insight into the nature of the earthquake.
USGS: Keeping a watchful eye
To monitor earthquake activity in California, the Pasadena Office of the U.S. Geological Survey (USGS), along with the Caltech Seismological Laboratory, oversees a network of more than 350 remote seismometers in southern California. The Southern California Seismic Network (SCSN) is part of TriNet, a cooperative effort of the USGS, Caltech, and the California Division of Mines and Geology. The USGS says this process is "critical to the evaluation of earthquake hazards in California and to the advancement of geoscience as a whole."
Since it began monitoring in 1932, the system has logged more than 356,300 events throughout California. In 1999, a total of 12,373 earthquakes and 993 blasts were catalogued by the USGS system and the monitoring network. Of the catalogued events, 393 were equal to or greater than magnitude 3.0. The three largest earthquakes in California over the last 12 years are Loma Prieta in October 1989, measuring 6.9 in magnitude; Northridge in January 1994 at 6.7 in magnitude; and the Hector Mine quake at 7.0.
Current upgrades to the network include updating it to digital technology, adding real time capabilities and installing additional monitoring stations.
Advise and consent
In an effort to minimize earthquake risk in the state, the legislature in 1975 created the California Seismic Safety Commission (CSSC), an independent agency that is charged with advising the governor, state legislature and local governments on issues of earthquake safety and recommending policies and programs to reduce earthquake hazards. In addition, the Seismic Safety Commission reviews seismic mitigation activities funded by the state of California as well as providing a consistent policy direction for earthquake-related programs for agencies at all levels of government.
Under the leadership of Executive Director Richard McCarthy, the 17-member commission conducts research and provides expert guidance on seismic risk reduction issues. Its main job, McCarthy explains, is to sponsor seismic-related legislation and to review and comment on legislation introduced by other organizations or members. The CSSC also oversees California's Earthquake Hazards Reduction Program.
The commission further is responsible for developing a statewide strategic plan to implement earthquake loss reduction. The California Earthquake Loss Reduction Plan is designed to save lives first and foremost, then to minimize structural damage and property loss in the event of an earthquake. Creation and maintenance of the plan also is tied to California's eligibility for federal disaster funds through FEMA.
A key goal of the Earthquake Loss Reduction Plan is to help establish a stronger, more stable market for California homeowners and commercial property insurers. The Seismic Safety Commission has a memo of understanding in place with the California Earthquake Authority and also works with the California Department of Insurance to identify and implement earthquake protection techniques that can help consumers qualify for premium reductions and tax credits.
Actions get results
Offering an example of the Seismic Safety Commission in action, Executive Director McCarthy points to hearings conducted after the disastrous 1994 Northridge quake. A key finding was the need to improve the structure and design of steel connectors used to tie framing and flooring together in commercial buildings. The commission found that there was extensive cracking in these columns and issued a public alert. As a result of these findings, it obtained $15 million from FEMA to solve the problem. Results of the findings are being finalized, and building codes will be changed.
"One of the biggest problems in California safety is unreinforced masonry buildings," McCarthy says. "We inventory local governments every two years and poll communities, and follow up on what cities are doing to catch up on retrofitting inventory. It is up to the city to determine how to handle retrofitting and safety concerns, but it is not mandatory." Another problem, McCarthy says, is non-ductile concrete buildings. These are older commercial or apartment buildings that were constructed without reinforcing bars in the concrete molding.
Meeting the challenge
To many Americans, California truly is the Golden State--the land of boundless opportunity, easy living and an "anything goes" mindset that places a high premium on skill and daring. The dark side of "California Dreaming" is the fault lines that riddle the state and keep its residents constantly on the alert for the next potentially devastating earthquake.
Like other forces of nature, earthquakes likely will never be completely understood; and it's even less likely that their destructive power will ever be controlled. A realistic, practical approach is what's needed to save lives, mitigate damage and provide adequate insurance protection--and that's exactly what the California Earthquake Authority and the California Seismic Safety Commission are doing every day. *