Earthquakes are a part of life for many communities across the world, but the risk presents unique challenges for insurance companies. The potential severity of a catastrophic earthquake is very high, but many property owners continue to retain much of the risk themselves, leading to a considerable earthquake protection gap. Learn more about this significant coverage gap and how agents can help resolve it in this blog.
Closing the Earthquake Protection Gap
The coverage gap is significant. In California, data showed only about 12% of eligible homeowner’s policies had earthquake coverage and for those insured under the state’s FAIR plan the numbers dropped to around 4%. These numbers show a considerable earthquake protection gap, creating an important opportunity for agents to review coverage decisions with policyholders.
For some insureds, retaining their earthquake risk may be the best decision, and for others, agents can help them evaluate their specific risk as part of an overall financial resilience plan.
Here are three ways to frame the conversation with policyholders about their earthquake protection gap:
Shift the conversation from coverage to risk. For many policyholders, earthquake coverage is a difficult purchase. Earthquakes are low frequency events compared with many other perils. Reframe the conversation away from price to a discussion about the risk. Discuss the financial risk the policyholder is retaining, and then help them understand their unique exposure, evaluate available options, and consider mitigation efforts. Then the policyholder is ready to make an informed decision, whether that is to retain the risk or purchase coverage and shift the financial responsibility.
Help policyholders understand earthquake coverage they may already have in place. A critical part of the conversation includes clarifying what the existing property insurance covers for earthquake loss. Generally, standard homeowners, renters, and condominium policies do not cover damages caused by earthquakes, but California does require homeowners and renters policies to cover secondary fire damage caused by or following an earthquake. Earthquake coverage is often available as an endorsement, separate policy, or through the California Earthquake Authority for California policyholders. Agents should also review conditions and exclusions with policyholders and ensure they understand the limitations of their standard policy.
Revisit the coverage decision as risks evolve. As a policyholder’s exposure changes, revisit the earthquake coverage decision. Property values change, costs to rebuild fluctuate, and policyholders may experience a change in their risk appetite, deciding to retain or transfer more risk than in past years. Coverage options also may change, meaning a policyholder who declined coverage in the past may be interested in current offerings. Agents should carefully discuss deductibles during the annual coverage review. Earthquake deductibles can be significant and are often a percentage of the dwelling coverage. As many policyholders are familiar with deductibles as fixed amounts, a percentage-based deductible can create a very different experience that an agent can help clarify.
For agents helping policyholders to close the earthquake coverage gap, it is helpful to remember that insurance is only effective as a financial resilience tool when policyholders understand how their coverage will respond after a loss and the amount of financial risk they retain.
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External Links:
- https://www.insurance.ca.gov/0400-news/0200-studies-reports/0300-earthquake-study/upload/EQEXP2024Summary.pdf
- https://www.iii.org/article/earthquake-insurance-for-homeowners
- https://www.earthquakeauthority.com/california-earthquake-insurance-policies/homeowners/coverages-and-deductibles
