Earthquake are unique: they come without much warning and they can be incredibly destructive. California, in particular, is notorious for its propensity for earthquakes, yet the earthquake insurance uptake rate in California remains very low.

In this episode of Core Conversations, host (and earthquake seismologist) Maiclaire Bolton Smith sits down with Shawna Ackerman, Chief Risk and Actuarial Officer for the California Earthquake Authority (CEA) to talk about the 1994 Northridge earthquake, how homeowners can better prepare for the next Big One, and what the future holds for the CEA.

(upbeat music)

- Welcome back to Core Conversations, a CoreLogic podcast.

I am your host Maiclaire Bolton Smith

and I'm the Senior Leader of Research and Content Strategy

with CoreLogic.

In this podcast,

we'll have conversations with industry experts

about key topics from housing affordability,

to the impacts of natural disasters on property.

Earthquakes are one of the most destructive natural

disasters.

And because they strike without warning,

they can trigger a lot of fear.

However,

while there are thousands of earthquakes every year,

there are only very few of them that are damaging,

and those are rare, and that can cause complacency.

But there's a lot that you can do to better

prepare your homes and businesses for earthquakes.

And that's what we wanna talk about today.

I'm really excited about today's episode.

I mentioned in a previous episode that I have a background

in earthquake seismology.

So,

this topic is very near and dear to my heart and warning,

I may have to nerd out a little bit.

In 1994, the magnitude 6.7 Northridge earthquake struck

the greater Los Angeles area.

At the time,

this was the costliest natural disaster on record,

and it would take over a decade for

hurricane Katrina to supersede it.

And fun fact, it was this earthquake that solidified

in my then teenage mind,

that I wanted to become a seismologist.

So one of the most important achievements

since the Northridge earthquake was the funding

of the California Earthquake Authority, also known

as the CEA.

A privately funded, publicly managed organization

that sells California earthquake insurance policies

through participating insurance companies.

The CEA was established in 1996 by California legislature,

and they've been a partner of CoreLogic

since their inception.

Today, we welcome Shawna Ackerman,

Chief Risk and Actuarial Officer

with the California Earthquake Authority to talk

about the CEA and the role they play in earthquake

insurance.

Shawna, welcome to Core Conversations.

- Happy new year Maiclaire, it's a pleasure to be here.

- So let's start by introducing you to our listeners.

Can you tell us a little bit about your background,

and your role with the CEA?

I know you don't sit around waiting for earthquakes

to strike at all moments like the earthquakes..

Like the movies portray.

- (chuckles) As you noted,

I am the Chief Risk and Actuarial Officer at the CEA.

A role that I've held for just over a year.

Prior to that, I was the Chief Actuary,

a position I took on in 2010.

But I have been involved with the CEA in one way or another

since it was formed.

I started my insurance career at the California Department

of Insurance, and was actually working there when

the CEA was created, and living in Santa Monica when

the Northridge earthquake occurred.

- Oh, so you are the right person for us to be talking

to today.

I definitely wanna hear more, maybe about your experience

of what it was like living through that earthquake,

but let's just dive into the CEA first.

And as I mentioned off the top, the CEA was created

following the Northridge earthquake in 1994.

So can you talk a little bit about how the CEA

came into being, and how Northridge was a catalyst?

- Well, the short answer is that the Northridge earthquake

created an availability crisis in the homeowner's insurance

market.

And the CEA was created as a public-private partnership

to alleviate that homeowners insurance availability crisis.

For the longer answer,

I'm going to have to jump us back 10 years prior

to the Northridge event.

Don't worry, I'll move fast.

In 1984, California passed a mandatory offer law,

which requires any insurer that writes a personal

residential policy to also offer earthquake coverage.

As a result of that law,

insured earthquake exposure began to grow and grow.

10 years into this ever increasing exposure growth,

the Northridge event occurs,

and wipes out all of the earthquake premium collected

and then some, in less than 30 seconds.

- Wow.

- The magnitude of the loss,

and that the earthquake occurred

on a previously unknown fault,

was essentially a wake-up call to the industry.

Literally a wake up call for me,

but a wake up call for the industry.

Which realized it did not have a comprehensive view

of the risk or what it costs.

You have to remember that at that time

catastrophe loss models were still in their nascence,

and nowhere near as widely utilized in the insurance

industry as they are today.

So with the mandatory offer requirement in place,

the quickest way for the industry to control earthquake

exposure was to stop writing homeowners insurance,

thus the homeowners insurance availability crisis.

At one point, about 95% of the industry was writing

restricted writings.

After a lot of work by the insurance industry,

the legislature, and the insurance department,

the CEA was created and opened its doors for business

in December of 1996.

We are truly a public-private partnership.

We were initially capitalized by our participating insurers,

funded by the premiums that our policy holders pay,

and governed by public officials.

- Wow, that's quite the history

to get you to where you are now.

And talk about life-changing in a split second

and really for in 30 seconds time to change the industry

so fundamentally.

So, if we dive in then the CEA issues insurance policies

through participating insurance companies,

can you talk a little bit about then how a CEA policy works?

- Right. The CEA is technically a public instrumentality

of the state of California. It's a big string of words.

But really we operate as an insurance company,

creating the insurance product, setting the rates.

Our participating insurers basically act as our agents.

They sell and service the policies.

And when there is an earthquake,

we rely on our participating insurers to settle the claims.

Which is a really efficient feature in as much

as we don't have to a big staff or a standby staff

on retainer to adjust earthquake claims.

Our policy itself covers earthquake damage.

For a homeowner that means the dwelling structure.

And if they choose they can purchase coverage

for the contents of the house,

and additional living expenses,

which pay for additional costs.

If you have to be out of your house during repairs,

or you're required to leave your house for safety.

Our coverage is subject to a deductible anywhere from 5%

to 25%, except for additional living expenses,

which is not subject to a deductible.

For renters, the available coverage is limited to contents

and additional living expenses,

since they don't own the home and don't have an insurable

interest in the structure.

Our policy is really very similar to any earthquake

insurance policy on the market today.

- So, that's really interesting, and I think it may be news

to some, hopefully not, but I think some people

may not realize that earthquake damage is not covered

by your standard homeowners insurance policy,

and you do need a separate endorsement,

or separate policy for earthquake.

So in California, where you and I both live

and where the risk is the highest in the country,

the earthquake insurance take up is still relatively low,

shockingly, really, in some ways.

Why do you think that is?

- There are a few reasons I believe drive that result,

Maiclaire.

First, there is no requirement to purchase earthquake

insurance for a homeowner.

Insurers have to offer the coverage, as I mentioned,

but the consumer does not have to buy it to get a loan.

Second, there is a perception that earthquake insurance

is expensive, and it can be,

but I will note that it may not be as expensive

as you think.

And of course, what is expensive is in the eye

of the beholder,

and the financial particulars of that beholder.

And then third,

while I believe Californians are knowledgeable

about the possibility of an earthquake,

I think a lot of people either believe,

"Well, it won't happen to me",

or they take the Scarlett O'Hara approach

to risk management, "I'll think about it tomorrow."

Or they believe that their home won't suffer damage,

because they've experienced an earthquake,

and it didn't sustain damage.

I recall during one consumer focus group,

a person saying that his home had gone through

the Loma Prieta earthquake, and was earthquake proof.

Turns out his house was over 60 miles from the epicenter,

and experienced really only moderate shaking.

So we wouldn't expect that his house would experience

damage.

And to be clear,

while California does have strong building codes,

no house is earthquake proof.

- Yeah. So there's a couple things I wanna unpack there.

So, I think the first is,

many people, especially those who own a home, are aware

that you are required to purchase flood insurance

if you live in a designated flood hazard area

as designated designated by FEMA and the National Flood

Insurance Program.

But earthquake is definitely not the same.

And I think I agree with you

because it's not mandated, people don't necessarily

either don't think of buying it or to your other points,

think it's not gonna happen to them.

I, myself spending so much time

in the seismological community, and doing a lot of public

awareness, and working in many different industries,

the number of times I heard, "Well,

I lived through this earthquake and my house was fine",

and exactly what you've just said.

Like, you could have been several miles away from,

hundreds of miles away from an earthquake,

and yes you felt the shaking, it's very different

than that earthquake being in really close proximity

to your home.

So, I agree with there's this lack of understanding

of what the risk is to many people, but also

until you live through a really damaging earthquake,

and if they were to occur more frequently,

it really is a behavioral thing that people need

to change their behavior on how they respond to things.

So we could..

That's a whole other topic that we could go on forever.

But I guess if we dive in more to..

Like if we look at take ups in California specifically,

I mentioned that they're relatively low,

can you comment on how many people have earthquake insurance

across California?

Are there in other certain regions or cities

where the take up is greater?

- Sure. The California Department of Insurance

publishes an annual report of insurance take up.

So, their most recent report is for 2019,

and the overall take up is just under 14%,

or about 1.7 million earthquake policies.

I wanna be clear that take up measure is the number

of earthquake policies divided by the number of residential

insurance policies.

So it's going to overstate the true percentage of coverage,

because it, yeah, it excludes all the people

who don't even have a residential insurance policy.

And you probably know, Maiclaire,

a lot of renters don't carry residential insurance,

so they don't have access to an earthquake policy.

So that 14% really does overstate the amount

of people that have coverage.

So to get to the second part of your question,

which is, does it vary across the state?

Well, it does.

The department also publishes by-County take up rates.

That analysis' done a little bit less frequently,

because it requires collecting more detailed data.

So the most recent report that they've published

is for 2017,

and it shows a range of take up rates as low as 2% in some

counties.

But there are five, yeah- - Wow.

- Well, there're counties that aren't

known to have had earthquakes,

although we'll probably talk about this later.

Really anywhere in California could have an earthquake.

But there are five counties with take up over 20%.

- Yeah.

- The highest is 27%, and that is Mono County.

And if you're not from California, and even if you are,

you might have to look that one up.

It's a relatively rural County on the border of Nevada.

If you ski, you may know it as the home of Mammoth

mountain ski area.

The other counties with greater than 20% take up

are Inyo, which is just South of Mono,

San Luis Obispo, San Diego, and Ventura.

- That's really interesting.

So I think, you know, part of the reason the earthquake,

the uptake rates are not uniform across the state

is the risk is also not uniform across the state.

There are areas that have a higher risk than others,

but yeah, it's really interesting to see

that there are a few, I would not have necessarily

picked those ones to have the highest uptake rates.

So if we kind of focus on the opposite end of those,

because, you know, a lot of those numbers

are still pretty small,

especially in some of the biggest cities,

what are the ramifications of having such a low uptake?

I mean, there's a lot of people

that are not gonna have earthquake insurance

if a big earthquake strikes.

- Yeah. That low uptake really means that the majority

of the cost of earthquake damage is going to be uninsured,

or actually self-insured.

It falls to the homeowner or the renter.

It's gonna be their responsibility to fund the repairs

or replace their belongings from savings or borrowing.

There are, as you know, numerous entities,

including federal, state, and local governments,

and generous people, that will step in to help

after any natural disaster.

But that help is usually focused on immediate needs

like food and shelter.

It doesn't cover the cost of rebuilding individual homes

or long-term recovery for individuals.

So again, the majority of the cost is gonna fall

on the shoulders of the people who experienced the loss.

- So you and I both live in the Bay area,

and it's been a number of years since we've had a large

damaging earthquake here.

And I think of other natural disasters and, you know,

the hurricane Katrina, New Orleans,

the Paradise fire here in California in 2018.

After big events like that,

people couldn't afford to rebuild their homes.

And we're looking in an instance where people

do not have insurance and, you know,

we really could see people moving and leaving the area

because they can't afford to rebuild where they are here.

So if we take that and pivot from there a little bit,

I wanna talk a little bit about retrofitting,

and that's where you have structural reinforcement sometimes

which can be relatively simple,

are made to a home to make it more resilient.

So one of the thing we've done together

at CoreLogic and CEA, is we've done some studies that looked

at the impact of retrofitting.

Can you talk a little bit about how studies

like this help the CEA,

and then ultimately the policy holder?

- The studies help us understand the reduction

in risk associated with retrofits,

both from an individual basis and a collective basis.

On the individual basis,

the results are translated to mitigation discounts

to the policy holder.

So hopefully that sends them a clear pricing signal,

which provides an additional incentive to mitigate.

For example, we provide up to a 25% discount

for retrofitted homes.

On a collective basis,

we can look at the effects of mass retrofitting,

which if it were done, would lower the overall risk

to our portfolio significantly, and to the state as well.

That's an aspirational kind of study, but it is interesting

and exciting to see the difference retrofitting can make.

When we looked at this with you in 2019

as part of the 30 year anniversary of the Loma Prieta event,

CoreLogic modeled a repeat of that event

using current residential building stock,

and estimated an $8 billion loss.

Then you remodeled it with all of the older homes

brought up to more current building codes,

and the estimated loss was reduced by $2 billion or 25%.

That's a lot of potentially avoidable damage.

So, I don't have it in my power to snap my fingers

and make every old house, you know, be retrofitted.

But if we could encourage people to do that,

there's a lot of damage we could avoid.

- Yeah, that's, there's a famous quote from Lucy Jones

a seismologist with the US Geological Survey.

She's now retired, but she's famous for saying,

"The earthquake is inevitable,

the disaster doesn't have to be."

There is so many things that we can do to help prepare,

both from personal preparedness to preparing our properties,

for an earthquake just to make sure that the disaster

is..

That it's not a disaster. That is just less impactful.

So, okay.

I can't help myself, I need to nerd out just a little bit

here.

So few years ago there was some new science released

and it showed that there's the possibility that any fault

in California could trigger another fault that's in close

proximity to it. Kind of forming a domino effect.

So this changed how people understood the risk profile

in California, and quite substantially in some regions.

So, how does this research like this impact the CEA?

- Well, our enabling statute requires

that we use the best available science in setting our rates.

So we closely follow the seismic research

from USDS and other entities,

and rely on our catastrophe loss modelers to implement

that science into their models for our use.

The particular research you're referencing resulted,

as you said, in substantial changes at the regional level,

and it added a recognition of the possibility

of larger events, rare, but really much larger events

than we had previously considered.

So we did need to update our rates to reflect

that new science, and in 2019 rolled out a new set

of rates after receiving approval from our governing board,

and the insurance commissioner to do so.

In some areas there were substantial increases,

and we are implementing the larger changes

over a three-year period.

- Yeah, it was...

I look back at that research when it did come out,

and what we saw is that there were the possibilities

of having much larger earthquakes

than we ever thought possible.

And the other thing was that we've always assumed

from a scientific perspective that we would not

simultaneously have an earthquake in Northern California

and Southern California at the same time.

So, not causing mass havoc across the entire state,

but also being able to pull resources

from one half of the state to help the other.

And then the science showed that it's actually possible

that you could have one major earthquake that would impact

the entire state.

So, I don't wanna get into doomsday scenarios

or anything like that,

but I guess just to finish off today,

we don't have a crystal ball,

we can't see what's gonna happen with the future

of earthquakes.

We can't predict when an earthquake is going to happen,

but I will say if you live in California,

it's gonna happen, at some point.

And we all do need to be prepared.

And not just California,

all along the..

From much of almost, I think there's 42 states.

It's 42 states in the US that have some degree

of seismic risk,

and then also elsewhere around the world as well.

So, wherever you are, know how to keep yourself safe

during an earthquake,

know to personal preparedness, to drop cover and hold on

to protect yourself physically when an earthquake happens.

But yeah, we can't predict what's going to happen.

But, if we look into that crystal ball,

what's coming in the future for the CEA?

- Well, I'm not even gonna look too far into a crystal ball.

This is underway.

I mean, we're really, really focusing on getting

the mitigation message out.

So for anyone that's living in California in a house built

before 1980 that has not been retrofitted,

you're hearing me now,

I really encourage you to get that house retrofitted.

It won't make your house earthquake proof,

but it could save you thousands of dollars

in earthquake damage avoided.

We created the California Residential Mitigation Program

in partnership with the Governor's Office

of Emergency Services several years ago

to promote retrofitting with education and grants

of up to $3,000.

The grants are limited to available funding of course,

and awarded by lottery.

But even if one doesn't get a grant, there's a lot

of information available, including a contractor

directory to get you started.

And that information is available

at earthquakebracebolt.com.

We're also recently completing an update

to our earthquake damage assessment and repair guidelines

for claims adjusters,

and a new document for engineers.

So we're in the process of updating our training,

and really increasing our preparedness

for the next damaging earthquake.

- That's so great.

And also you've..

I know the CEA over the last number of years,

in addition to all of that, has had a huge impact

on public awareness and public education,

and a lot of the commercials and public education campaigns

that you've had,

I think are finally starting to make an impact,

and people are understanding that the earthquake risk

is real, and the CEA gives you the strength to rebuild.

So, Shawna, thank you so much.

This has been so great.

Thank you for joining me today

on Core Conversations, a CoreLogic podcast.

- Thank you, Maiclaire.

It's always an enjoyable experience to talk with you.

- So for more information and insights on natural hazard

events, both an active events and ongoing research

into past events,

please visit us at hazardhq.com.

And for information on the property market

and the housing economy, visit us at corelogic.com/insights.

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