Would the insurance companies have enough money to pay all of the folks who had homeowner’s insurance if there was a very large earthquake in Los Angeles? I don’t think that nearly everyone there is insured, but it seems as if the damage could go into the many millions of dollars for the people who are insured. Don’t get me wrong, I like the L.A. area very much, it is not a criticism of L.A., but I was just curious about the financial aspects of property damage. Lastly, if you were considering buying a condo or home in L.A., would you have second thoughts due to earthquakes, or would you just rent an apartment or home, as that may be less risky? Thanks for your opinions.
Farmers estimated it lost about one billion dollars after the Northridge Earthquake. There are standards they use so they don’t individually insure too high a percentage of building in any one area. Also, they have considerable “re-insurance” to cover events like Earthquakes. As far as I know, no major company has ever been unable to pay claims after a big “event.” (not that they always pay fairly, but that’s another topic entirely)
A standard homeowners insurance policy does not cover for earthquake damage. You need a special rider or specific earthquake insurance policy.
You have to pick up an earthquake rider, as standard policies specifically exclude earthquakes. A lot of people get theirs from the California Earthquake Authority, which is a state-sponsored entity. It specifically says that if it doesn’t have enough money and the Legislature declines to kick in enough tax money, it will simply decline to pay all its claims. You won’t be able to sue them, because this is part of the policy.
Basically, earthquake insurance is useful if yours is one of the relatively few houses that need it. In a giant 8.0 temblor there simply wouldn’t be enough money to pay everyone. But then again, what would be the point? Once you get to where the number of claimants is comparable to the number of premium-payers, insurance is just a weird game of Peter collecting from Paul, and Paul collecting from Peter.
Most earthquake insurance is expensive. And the deductible is 15%. You own a half million dollar home that makes the deductible $75000 and cost in the range of $1500 per year.
So no I do not have earthquake insurance in San Jose.
The CEA is reinsured up to $9 billion. That’s enough to cover every residential loss in any conceivable earthquake, given that only 12% of households actually have earthquake coverage.
No, but yes. How’s that for an answer?
Short term, some insurers would likely post a loss on the books for that year (or several years, depending on the amount of claims), so from that perspective there is not enough money on hand at some insurers to pay the losses. Short term, in very simplified terms, some insurers would have to borrow the money to pay the claims. Most insurers would recover, over time. Look at the large insurers profits before and after hurricane Katrina.
Also remember, large insurers receive premiums from all over the country and most catastropies, even $46 billion dollar ones like Katrina, are fairly localized. IOW, the insurers have a nationwide bucket of premium and investment dollars from which to pull claims money.
Not just nationwide, but worldwide. That’s what reinsurance is for. Insurance companies themselves have insurance in case of a large catastrophe.
I lived in Glendale in L.A. County for 12 years and declined earthquake insurance. It was pricey, but the minimum deductible, which then was 5% of insured value was onerous. I now live in far northern California, near the triple junction of plates 50 miles offshore of Eureka. I still have no earthquake insurance because of the deductible (now 10%), and the $1500 annual premium.
But to answer your question, I’m TOTALLY convinced that even if I had EQ insurance with a private carrier, no matter how well funded, I would receive NO payout for my loss. We’re talking billions of dollars in a major quake. No way. I frankly wonder why anyone pays for EQ insurance. They will never see their home rebuilt from an insurance check.
The insurance companies can afford to pay out claims in the billions of dollars, if need be, because of reinsurance. In other words, it isn’t just policyholders in California who are covering the claims, but policyholders in Kansas, New York, Ontario, France, Australia, etc. Since even a major disaster only affects a tiny part of the globe, the worldwide insurance market is not disrupted when one occurs.
Not only that, but insurers don’t just use premiums from earthquake insurance to cover earthquake claims. Very simply put, all the incoming funds (premiums, investment income, etc) are comingled into the insurer’s cash on hand bucket. They use that money to pay claims from any cause, any where. What’s left over is profit (or loss if more is paid out than received in a given period).
ASGuy, if you have earthquake insurance with a reputable, well capitalized insurer (check their ratings with AM Best and/or Standard & Poor’s) the chances of not having a claim paid are vanishingly small. Whether policy cost and deductible make it not worth having is a whole 'nother discussion.
Another mitigating factor is that insurers don’t simply take all the customers that want coverage. There is financial capacity planning that goes on, and can get quite complex (there is software to help). Once they have written up to that cap for the year, they won’t take more business, more-or-less (this is a grossly-simplified version).
Granted, if we had multiple unexpected major earthquake events in diverse locations, that could overwhelm any capacity that is based on historical expectations.
This is why it pays to shop around. At any given moment insurer ‘A’ will have too much EQ on their books and ‘B’ will be short - it follows that ‘A’ will raise their premiums and ‘B’ will lower theirs. This also applies to motor insurance.
I read a story, that may well be true, that after the great SF earthquake in 1906, Lloyds of London gained a huge amount of future business because they paid up promptly, while the local insurers used the courts to delay payouts as long as they could.
When I lived in southern Illinois, not far from the New Madrid fault, I got earthquake insurance. I just didn’t want to take any chances, and for about $30 a year, what the heck? That money went into the pot too.
Between the time premiums are paid and the time that claims are paid, the insurer invests the money. This is called “float” and Warren Buffett explains this idea on page 6 of his 2009 letter to shareholders of Berkshire Hathaway, available in PDF form here. He mentions, by the way, that Berkshire Hathaway’s float was $62 billion at the time. And that’s only one of many insurance companies out there. So in a major disaster, the insurance industry can absorb a lot in claims.
I live very close to a major fault and do not have an earthquake rider on my homeowners insurance. I lived through an earthquake that destroyed my nearby previous house, a total loss (I didn’t own it). I have seen what earthquakes will do. I’m still not buying insurance.
The vast majority of homes built to modern earthquake standards, such as the one I own, suffer little damage in earthquakes. What happens is everything inside your house that can fall and break, does, from cereal dishes to refrigerators. All that damage is usually right about what your deductible comes to.
Instead of earthquake insurance, make sure you have a continuous perimeter foundation with a proper footing, that your house is securely anchored to it, your house is sheathed with plywood, and you have no unreinforced masonry (commonly this would be old chimneys). Then all you’ll have to do is pick up all that broken glass.
Also, if you live below a steep hill of unconsolidated soil, or on landfill, you should consider moving.