California Earthquake Authority prepares to go into ‘hyperspace’
The California Earthquake Authority – the state’s quasi-public earthquake insurance pool – long has had a problem with take-up. Only about 10 percent of homeowners in this most seismically active state actually buy coverage for the biggest catastrophic peril they face.
But new policy options and a sizeable rate reduction has the CEA’s CEO – former North Dakota Insurance Commissioner Glen Pomeroy – very excited. Before a crowd of hundreds of industry representatives and regulators at last week’s National Association of Insurance Commissioners conference in Chicago, Pomeroy outlined the changes that he hopes will drive California’s earthquake insurance take-up rate to a hitherto unknown high.
The CEA has been busy under Pomeroy. In 2014, it worked with Assemblyman Ken Cooley, D-Rancho Cordova, to improve the language of the mandatory offers its members use as their principle outreach tool to the public. The offers, which accompany renewal notices for residential insurance policies, had gone unrevised for decades.
Benefitting from lower reinsurance premiums and the availability of alternative financing mechanisms like catastrophe bonds, the CEA also was able to file for a 10 percent rate reduction last year with the California Department of Insurance. In addition, the CEA sought newly flexible options for structuring earthquake policies. Lower and separate deductibles were proposed, in addition to higher policy limits and mitigation discounts of up to 20 percent. Those changes, now approved, will go into effect at the stroke of midnight as the calendar turns to 2016.
Remarking on the changes, Pomeroy observed that “all of this moves into hyperspace next year when we begin to offer new options.”
But while the CEA counts down its launch into hyperspace, it does so while crewing a ship of humble design. That’s because, as Pomeroy emphasized to the Chicago audience, the CEA was created to forestall a collapse of California’s homeowners’ insurance market and not to actually cover a meaningful number of residents. In other words, the CEA exists to provide a mechanism for red-blazered professionals to find Californians their dream homes, not to rebuild those homes.
The Golden State is home to $1.6 billion of the nation’s $2 billion in annual earthquake insurance premiums; a testament to the value of the CEA. But the startlingly unserious approach with which California has heretofore approached seismic peril stands in contrast to the dire risk that earthquakes pose.
Addressing the threat posed by seismic vulnerability will require cultivating much greater private stakes in earthquake peril. The ultimate solution to achieve that goal is to require seismically vulnerable properties to maintain earthquake insurance as a precondition for obtaining publicly backed mortgage loans, just as flood-prone properties must maintain flood insurance. Unfortunately, that’s a solution for which neither Democrats nor Republicans have shown any appetite.
The foundational problem for how to account for earthquakes is epistemological, a problem of knowledge. At the conclusion of his remarks, Pomeroy reflected on that problem. He quoted Kathryn Schulz’s recent work in The New Yorker, titled “The Really Big One.”
On the face of it, earthquakes seem to present us with problems of space: the way we live along fault lines, in brick buildings, in homes made valuable by their proximity to the sea. But, covertly, they also present us with problems of time. The earth is 4.5 billion years old, but we are a young species, relatively speaking, with an average individual allotment of three score years and ten. The brevity of our lives breeds a kind of temporal parochialism—an ignorance of or an indifference to those planetary gears which turn more slowly than our own.
In this context, Pomeroy’s allusion to hyperspace is apt. Convincing people to purchase earthquake insurance – convincing them that they want to purchase earthquake insurance – is a matter of bending space and time. It requires connecting the comfortable present with a desperate future. Marketing and Hollywood blockbusters strive to do just that, but it is not without a dose of irony, and certainly cold comfort to Pomeroy himself, that the best promotional tool available to the CEA are earthquakes themselves.
