Market Timing: A Faulty Strategy on Earthquake Coverage

Many Clients Buy Coverage When Earthquake Activity Arises, Then Cancel When It Subsides

Ask anyone who has been affected by the recent volatility of the stock market, and they will tell you that it’s almost impossible to time the stock market’s ups and downs — and even more difficult in today’s financial environment. Those who attempt to “beat” the market, over the long run, will lose. The same can be said for earthquake insurance.

Most people think that earthquakes are mostly a California problem, but earthquake activity can occur, and has occurred, in Nevada, Utah and as far east as Illinois. Even in South Carolina, there is a fault line that produces tremors. With each earthquake, managing general agents see an increase in the number of retail agents requesting earthquake coverage for insureds. Many may be purchasing earthquake insurance because they realized they needed coverage and will continue to purchase it for the long term. However, history has shown that many purchasers are, in effect, trying to time the earthquake market.

It is when earthquake activity occurs in their region that insureds decide it’s time to buy earthquake insurance. Once the activity subsides, they cancel or let their earthquake policies lapse. There are three very good reasons why this is a bad approach, and agents should advise their clients accordingly:

1. Timing May Be Wrong

If insureds think they can wait for a few tremors in their area and then have time to obtain a new earthquake policy, they could be very wrong. Quite often, there are no signs of earthquake activity prior to a moderate to major severity earthquake (categorized as a 5.0 or higher on the Richter Scale). An earthquake loss can happen without any prior activity or notice.

2. It May Be Too Late to Get Coverage

After an earthquake or small tremor occurs, most insurance companies implement a moratorium on new policies in that region for a period of days, where no new policies can be written. This is to protect insurers against aftershocks or to decrease the chances of insuring a building that was damaged by the initial earthquake (prior to the insured purchasing the coverage). So, in many cases, agents will not be able to find coverage for their clients.

3. The Coverage May Cost More

The law of supply and demand often kicks in for a region that shows signs of earthquake activity. With the occurrence of earthquake activity, more consumers rush to their agents to buy coverage. As earthquake capacity is often limited, the supply stays constant but the demand goes up — driving prices up.

Insureds could end up paying significantly more than if they had purchased an annual earthquake policy prior to any actual earthquake activity. In addition, as insurers often do, they may reward long-term customers with renewal credits for staying with the same insurance company for a period of years.

Important Factors for Insureds

In helping clients with earthquake insurance, there are important factors that agents should understand before placing coverage.

Location — Many services, including the Insurance Services Office (ISO), rate the earthquake exposure of particular geographic areas by assigning them a hazard zone. It is important whether a location is in a high or low hazard zone. This will affect coverage availability and pricing. Earthquake zone maps are available from ISO and other companies.

Building Construction — Construction can affect damageability, and therefore rates, in a manner that is different than the typical fire exposure. For instance, a frame building can withstand an earthquake better than a masonry building. There also is a difference in a true masonry building versus a brick veneer building in withstanding damage from an earthquake (brick veneer buildings do not hold up as well).

Year Constructed — Building codes in areas susceptible to earthquakes make a building better able to withstand an earthquake. It’s important to understand what codes were in place when the building was constructed and whether any earthquake code modifications have been made to the building.

Special Deductibles — Special earthquake deductibles often apply, usually expressed as a percentage of the total insured values being covered for earthquake. Deductible values can range between 1 percent and 10 percent of total insured values.

The money spent on earthquake insurance premiums is often a very small percentage of a consumer’s overall spend on insurance, making the coverage well worth the cost. In addition, many consumers do not realize that earthquake is not covered in most standard commercial property and homeowners policies. It must be added as a separate coverage or policy.

Wall Street pundits often claim that to “buy and hold over the long term” is the best strategy for asset protection. Those who know insurance agree that such a strategy pays off for earthquake coverage as well. Agents should work with their customers to determine their earthquake coverage needs and options, and strengthen their own personal or business asset protection plan.

Topics Catastrophe Natural Disasters Agencies