Why Some Quake Insurance Rates Have Shot Upward

A former Times editor, Noel Greenwood, echoing a few other messages I’ve received lately, asks, “Does anyone at the state earthquake authority know what the hell they are doing?”

Greenwood, who lives in Santa Barbara, explained, “My premium for quake coverage has gone from $289 to $621 in one year, without explanation of any kind. . . .

“My cost of quake coverage is now roughly equal to my basic home insurance policy ($621 to $673). This makes no sense, and it’s a sure way to discourage people from buying quake coverage.”

I read this to Mark Leonard of the California Earthquake Authority.

He confirmed that there have been some price increases since May, but said that in 50 of the state’s 58 counties prices have declined, from an average of $2.92 for each $1,000 in coverage to $2.79.

In parts of eight counties--Los Angeles, Ventura, Santa Barbara, San Bernardino, Mendocino, Humboldt, Napa and Sonoma--however, prices increased.

Although Leonard said most of L.A. County had slight decreases, premiums in places like Palmdale--right on the San Andreas fault--where the prices were low, were adjusted upward.

Leonard insisted that the earthquake authority knows what it’s doing, implementing a legislative mandate to change its rates as more scientific information becomes available.

For instance, in two counties--Ventura and San Diego--the authority’s advisor, EQE International, analyzed new information on the composition and stiffness of soils. Ventura prices were then raised, while San Diego’s were lowered.

Leonard added that the practice of not telling policyholders a reason for their changes will be halted soon.

But these details don’t really get to two major questions that arise about California quake insurance, which now costs more and usually gives less coverage than before the 1994 Northridge earthquake.

First, do scientists really know enough about comparative quake risks to justify these price changes?

Second, is earthquake coverage a good deal for consumers or not?

The president of EQE, Peter Yanev, is refreshingly frank about the basis of the recommendations his firm makes to the earthquake authority:

“This is an art, as well as a science and engineering,” he said. “We don’t know enough to predict when an earthquake may occur, or where it may be. Anybody who tells you that we do is full of you know what.

“We may not know for five years or 50. . . . But what we’ve got is good historical data in California going back 200 years, and some tectonic and archeological data from fault trenching going back 2,000 years. . . .

“We still can’t predict. There are so many variables in the process that . . . we must deal in probabilities.” (The San Andreas fault is millions of years old).

The probability is, scientists say, that certain parts of the state--the North Coast, the Bay Area, Ventura County, the Imperial Valley--are more likely to have significant temblors than other parts--Sacramento or San Diego.

But that does not mean a very damaging quake would never occur in Sacramento or San Diego.

Still, in setting prices, and to avoid the possibility that people living in the riskiest areas will buy a disproportionate share of the insurance, putting a fiscal strain on the damage payment system, the earthquake authority charges more in areas considered risky.

It sounds iffy, Yanev admits. “But it’s not a lot different than assessing risk in other accidents.

“With airplane crashes, we know a lot,” he observed, “but there are so many variables, you still must deal in probabilities.”

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In helping to calculate what quake insurance rates should be, he said, “we use a database of well over a million earthquakes. We develop an annualized loss curve. In a one-year event, we say the worst might be, on the average, a $1-million loss. . . . Every 100 years, there might be a quake bigger than Northridge, a $50-billion loss. . . . If you go to a million-year event, for all practical purposes, the state of California ceases to exist.”

The rates are being set, he said, to deal with the likelier events in a realistically limited time.

“We know enough to say we have a good handle on the probabilities of fairly strong quakes happening somewhere in a certain span of years. But we don’t know the probability of one hitting San Francisco before Santa Barbara.

“Is it perfect? No, it isn’t. Are we going to be surprised? Probably.”

Or as seismologist Egill Hauksson of Caltech put it when asked about the reliability of pricing: “My feeling is there’s a lot of uncertainty here. But they do have to come up with some numbers.”

Yes, they have to charge something, if there’s to be any quake insurance at all. As it is, the proportion of homeowners buying it has declined from 30% in 1994, just after Northridge, to 17% now.

The implication is that there would be comparatively little coverage--forcing a reliance on federal assistance--if a destructive quake occurred soon.

Still, author Philip L. Fradkin, in researching his 1998 book, “Magnitude 8,” found that even some of the state’s leading quake experts did not carry quake insurance.

“Such insurance is not a given for everybody,” he said. “Given the 15% deductible, and by far the greatest chance of a smaller quake causing only slight damage at one’s home, sometimes it seems better to put the money you would otherwise put into insurance into retrofitting or tying down expensive household items.

“It’s a close call, and each individual has to make it.”

On this point, Howard Kunreuther, co-director of the Wharton Risk Management Center in Pennsylvania, observes that it would be good policy to mandate that a person who retrofits be offered a lower insurance premium. This would encourage both retrofitting and buying insurance.

Like Yanev, all these experts are talking probabilities. But they can’t be sure any more than the rest of us that their probabilities will be borne out in what actually happens in the short term.

Ken Reich can be contacted with your accounts of true consumer adventures at (213) 237-7060 or by e-mail at ken.reich@latimes.com.