California Earthquake Authority Proposes to Lower Rates

The California Earthquake Authority on Thursday proposed an average 8 percent decrease in rates.

CEA’s Advisory Panel recommended the rate decreases, along with additional coverage options in deductibles, discounts and certain limits, to the CEA Governing Board, which next meets in December. Board approval would advance the proposals to regulatory consideration by the California Department of Insurance.

If the board and CDI clear the way, CEA’s new expanded coverages and lower rates would begin to take effect Jan. 1, 2016.

CEA CEO Glenn Pomeroy said an increasingly rate-friendly reinsurance space and capital markets with an appetitive for investing in catastrophe bonds generated enough savings for the carrier to offer the rate reduction.

“The risk transfer benefits to an organization like ours have increased dramatically over the last couple of years,” Pomeroy said.

In an announcement earlier this week, CEA said it’s selling $350 million in bonds to strengthen its ability to pay claims.

CEA, which provides roughly two-thirds of the residential earthquake insurance in California, has nearly 856,000 policyholders.

According to CDI, 10 percent of California households with home insurance also have the separate policy needed to cover earthquake damage. That fact was highlighted in August during the 6.0 magnitude earthquake in Napa, which has a dismal 6 percent take up rate on earthquake insurance.

The historic Pfeiffer Building in downtown Napa suffered major damage from Napa's 6.1 earthquake. The building was the
The historic Pfeiffer Building in downtown Napa suffered major damage from Napa’s 6.1 earthquake. The building was the “first stone and oldest surviving commercial building in Napa.”
Photo by Amy O’Connor, Insurance Journal

With the current proposal, CEA would expand customers’ choice of deductibles – the difference between covered damage and the CEA claim payment – from the present 10 or 15 percent to a range of: 5, 10, 15, 20, or 25 percent, for all policy types.

Pomeroy said in talking to policyholders and homeowners without policies that the increased flexibility of choosing lower premiums for a higher deductible or a deductible that would trigger coverage with smaller losses was of significant interest.

“There is a general understanding out here among California homeowners that we live in earthquake country,” he said. “Most of the people talked to said they would support efforts to make earthquake insurance more affordable and offer more choices.”

He said he believes the new coverages combined with the reduced rates will help boost earthquake insurance take up in California.

“We’re assuming a percent or two at least,” Pomeroy said.

CEA is also proposing a higher hazard-mitigation premium discount of 10 to 20 percent for homeowners. The discounts would be subject to verification of a retrofit. CEA’s current 5 percent retrofit discount would still be offered for new and renewal policyholders who do not verify a retrofit.

Other proposed coverage enhancements include higher sublimits for energy-efficient properties, chimneys, and glass breakage, as well as higher limits for personal property and loss of use/additional living expense coverages.

CEA is a publicly managed, privately funded, not-for-profit organization that provides residential earthquake insurance. CEA earthquake insurance is sold through participating insurance companies.