A fractured portion of highway along CA-178 following the 2019 Ridgecrest earthquake.

California’s Main Earthquake Insurer Looks to Make Cuts

The California Earthquake Authority, the state’s primary earthquake insurance provider, is warning it needs to cut coverage to avoid a future financial catastrophe.

The quasi-governmental entity might be considered a victim of its success. According to insurance industry credit ratings, it remains on solid financial footing, but it has potentially added too many new customers in recent years.

In a report to the governing board in September, the authority’s staff said it faces a “potentially unsustainable strain on its claim paying capacity.”

The staff report said the CEA must impose substantial rate hikes on its 1.1 million customers to reinforce its finances unless it reduces coverage. The cost of coverage could “double over the next five years unless affirmative steps are taken this year,” the staff report said. 

According to reports, the average policyholder pays $738 a year, although premiums in high-risk areas can cost thousands of dollars.

The authority is looking to reduce benefits “to keep rate increases at a minimum,” said the authority’s spokeswoman Sarah Sol in an email to The Sacramento Bee.

To avoid drastic premium increases, the staff recommended cutting how much insurance someone can buy for their personal belongings, from $200,000 to $5,000. Additionally, they want to eliminate its lowest-deductible policies.

The authority’s customer base has increased 28% since 2015, according to legislative reports. That growth has expanded the potential losses the CEA faces, as the total value of the property insured by the authority now tops $590 billion. In 2016, the figure was just $388 billion, according to reports.

Following the 1994 Northridge earthquake in Southern California, which caused an estimated $20 billion in residential damage, most private insurers refused to sell earthquake coverage. The California legislature filled the void creating the CEA in 1996. 

A big reason for the authority’s success is a lack of significant claims. “Since the CEA’s inception, there has not been a major earthquake,” the authority said in its most recent financial statement. That luck could change at any point.

The 7.1 Ridgecrest temblor in Kern County in 2019 was the last notable earthquake in California. It caused about $1 billion in damage but barely impacted the authority.

Photo credit: Nick Sklias / Shutterstock.com