Oklahoma ponders ‘California model’ for earthquake insurance
S.B. 1497, sponsored by Sen. Clark Jolley, R-Edmond, was introduced early in the legislative session and already has progressed through the Senate Insurance Committee. The bill authorizes the state’s elected insurance commissioner to create and organize a quasi-governmental reinsurance entity to assume losses Oklahoma residential property insurers might incur after a damaging earthquake.
Jolley argues the bill is needed because of what he fears will be a disruption in the state’s insurance market. After all, like California, Oklahoma is an earthquake-prone state. Of late, the Sooner State actually has experienced larger and more frequent temblors.
In a recent interview, Jolley described his vision for the bill. As he sees it, Oklahoma “would adopt a California-model earthquake reinsurance market, administered by the insurance commissioner upon a finding from him that there…[is] inadequate coverage.”
In the most general sense, that idea does have some likeness to the CEA. Like California’s authority, the proposed Oklahoma program is a statutorily created, privately funded entity that would bear earthquake risk. But that’s where resemblances to the CEA stop.
Though it may be counterintuitive, the CEA was not actually founded to provide earthquake insurance. Instead, it was designed to facilitate real-estate transactions that were subject to California’s long-standing regulation requiring homeowners insurers to offer earthquake coverage. The California residential real estate market went into “vapor lock” shortly after the massive 1994 Northridge earthquake nearly bankrupted several property insurers. No one could buy or sell a home because homeowners insurers largely pulled out of the market. No homeowners insurance meant no mortgage loans could be finalized. The real estate market was frozen.
The CEA was created to lift the burden of offering earthquake policies off the backs of homeowners insurers. The basic earthquake policies offered by the CEA in the wake of the Northridge quake were a means toward that end. Almost 20 years later, the CEA has grown beyond its humble genesis to provide competitive products to an undersaturated market, but its existence was never predicated on the outright absence of earthquake insurance.
And while Oklahoma wants to create “an earthquake reinsurance program,” that’s not exactly what the CEA does. The CEA certainly makes use of reinsurance, along with other risk-transfer mechanisms, but it largely serves as a coordinating body for its participating insurers to sell primary earthquake policies. It does not serve as a reinsurer of earthquake policies sold by other insurers.
Conversely, Oklahoma’s model would create a public reinsurer to offer earthquake protection to the insurance industry. If the bill’s aim is to have an impact similar to the CEA, providing the insurance commissioner with the authority to found a reinsurance program to protect private insurance companies will not accomplish that objective.
In fact, there could not be a less auspicious time to create a new quasi-governmental reinsurance entity to compete with private reinsurers. Private risk-transfer prices are at historic lows. The industry is going through a phase of consolidation, not growth, as it faces novel competition from the catastrophe bond market and other forms of insurance-linked securities. Adding a single-state, government-controlled reinsurer to the market will not drive rates down in a sustainable way. In fact, it may not drive rates down at all – at least, not for homeowners.
In those ways, Oklahoma’s effort to grapple with earthquake risk can’t really be said to be based on the “California model.” But if the Sooner State embraces lessons from the CEA’s history and current organization, it could yet address Jolley’s concerns about an availability crisis.
Jolley should be commended for being on the cutting edge in getting Oklahoma lawmakers to think about ways to address the affordability of earthquake insurance. Even short of an availability crisis, of which Insurance Commissioner John Doak says he sees no evidence, an uptick in seismic activity will surely drive Oklahoma’s earthquake insurance rates up. That’s a consumer problem, requiring a consumer-facing solution.
Legislation tackling either the causes of those quakes or means to prepare structures to withstand them may be the surest ways to drive those rates back down.