Are you shaking your head from sticker shock due to the increased cost of earthquake insurance? You aren’t alone. This is common place in today’s insurance marketplace. You are thinking there hasn’t been a major quake since 1994.  Why should rates go up so drastically?

Unlike the other types of insurance that your association purchases, earthquake insurance is considered catastrophe coverage. That means that when an earthquake occurs, lots of insureds are going to have losses at the same time. Those same companies that insure for commercial earthquake insurance insure for other types of catastrophes elsewhere in the world such as, tornados in the Midwest, hurricanes in the Southeast United States, the Caribbean and Southeast Asia, and earthquakes here and in the Far East.  A hurricane like Katrina will create huge losses for the same insurance company we are trying to purchase earthquake coverage from.

These insurers do not retain 100% of the exposure to these catastrophes. They purchase their own insurance called reinsurance, to limit their losses from any one occurrence. These reinsurance companies historically purchased 80-90% of the potential losses from the insurer that sold the policy originally. The quantity of coverage these insurance companies can offer is directly related to the amount of reinsurance they can purchase.

When a major catastrophe happens, such as Hurricane Katrina, which causes these reinsurance companies to pay on their policies, they have less capacity to offer and what they have to offer goes up in cost.

Hurricane Katrina, at over $70,000,000 billion in losses and counting, was beyond the expectations of most reinsurance companies. Those that were smaller in nature were forced to commit sums of money in excess of anticipated reserves (the money that insurance companies hold aside in anticipation of paying claims) to pay their claims. The excess funds were taken from the companies’ asset base, shrinking the amount they can offer this year, or in the case of many, leaving them with insufficient assets to continue doing business in the catastrophe marketplace.

These events have a ripple effect into the retail insurance companies that you buy your policy(ies) from. These companies, if unable to obtain sufficient reinsurance, are forced to do one of several things or a combination of them:

1. Discontinue writing catastrophe insurance altogether. This is why certain companies have left the earthquake marketplace altogether. They have insufficient assets or are unwilling to commit sufficient assets to be able to continue the program at any size, without jeopardizing the financial well being of the company as a whole.  A good example of this is Allstate, which is ceasing to write earthquake insurance in California.
2. Raise prices – In order to afford the increased cost of reinsurance and increased reserves they are now forced to keep, they have raised rates to cover those costs.
3. Increase deductibles - The further away from the first dollar of coverage the policy begins, the less likely it is to have to pay out. Earthquake insurance companies evaluate risks based on two factors: probable maximum loss and spread of risk.  Probable maximum loss means what the insurance company anticipates the typical loss for a type of building to be.  The other is spread of risk. This deals with how much of a loss is a company exposed to in a given area.  By raising deductibles, they are able to reduce the probable maximum loss on a given location.
4. Reduce limits offered - Instead of offering $10 or $20 million in coverage on a given association they will reduce coverage to 2-10 million.  This will both reduce the probable maximum loss and improves the spread of risk for the insurance company.
5. Stricter physical underwriting - Certain areas or types of construction are now off limits where a year ago they were happy to write them. If a building has tuck under parking or is a high rise, many companies are no longer willing to write them. Likewise if you have a well constructed building that sits on top of landfill or wetlands such as Marina Del Rey, Playa Vista, or Foster City, CA, companies that would have written it last year, will not write it this year.  These types of buildings and locations have much higher probable maximum loss possibilities so insurance companies are shying away from them.  This is because for the same amount of insurance extended they must retain much higher reserves.

This means higher prices and less coverage in the current insurance marketplace even when you are using an expert like us to handle your insurance. The good news is that it may not have to be as bad off as what your current agent is handing you. Due to the fact that we specialize in earthquake insurance we have access to markets that other agents don’t. We are also able to craft different solutions using the same companies that your current agent is using.  As an expert I am able to see opportunities that other agents overlook. This is why you only want to use an expert in condo association earthquake insurance to handle the bidding and placement of your association’s insurance. All you need to do is click below or call us at 888-664-3276 and we will be able to see if we can provide a better insurance value for you and your association.

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