California residents will pay higher earthquake insurance premiums next year as the California Earthquake Authority (CEA), funded by insurance companies and managed by the state government, will increase rates by an average of 6.8% starting in January 2025.
The non-profit organization stated on its website that while they strive to maintain affordable rates, state law mandates that their rates must be actuarially sound. They are committed to making earthquake insurance more accessible and affordable for the people of California.
Policies are sold through 20 member companies affiliated with the Earthquake Management Agency, and those seeking earthquake coverage must also carry homeowners’ or renters’ insurance from one of these companies.
Reasons for the rate increase include inflation, rising construction costs, and reinsurance prices (insurance purchased by insurance companies to help cover claims). Renters can expect an increase of less than $10 annually, while homeowners may face an increase of about $70, although adjustments for some policies may vary. Additionally, without an added cost, policies will set a new $500 sublimit for damaged personal property, including glassware, pottery, and other items.
Standard homeowners’, renters’, and condo policies do not cover earthquake damage, but typically cover fire damage resulting from earthquakes. Mortgage lenders usually do not require earthquake insurance, although most require homeowners’ policies to cover other damages.
According to data from the Federal Emergency Management Agency (FEMA), California experiences about 90% of the nation’s earthquakes, but only about 10% of Californians purchase insurance that covers earthquake damage.
Some homeowners and renters avoid purchasing earthquake insurance because most homes do not suffer damage exceeding the insurance deductible, leaving them paying premiums without assistance in the event of a disaster. Approximately one million Californians have CEA policies, representing only a small portion of homeowners and renters in the state. Policyholders who make seismic safety upgrades to their properties may qualify for up to a 25% premium discount. These upgrades are sometimes quick and relatively inexpensive–especially compared to the cost of rebuilding homes severely damaged in an earthquake.
The CEA identifies the most vulnerable homes as those with high foundations, homes on stilts, hillside homes, homes with living space above a garage, and prefabricated homes without seismic support. Charlotte Fadipe, the CEA’s Chief Communications Officer, stated, “It’s typically not the shaking of the earth that harms people, it’s man-made structures. The good news is that people can take action to mitigate this. We can help Californians prepare for destructive earthquakes and recover from them.”
The CEA was established after the 1994 Northridge earthquake in the northern Los Angeles Valley, which resulted in approximately $20 billion in residential losses, with about half of the losses covered by insurance. This event significantly impacted the insurance market as the industry underestimated the financial effects of medium to large earthquakes.
Insurance company data shows that insurers representing 93% of California’s market subsequently restricted or ceased writing residential policies, negatively affecting the housing market in California. To stabilize the housing and insurance markets, the state legislature established the CEA in 1996, allowing it to sell insurance through multiple participating companies. By 2024, the CEA policies covered two-thirds of all residential earthquake insurance in the state, making it one of the largest earthquake insurance companies globally.
Requests for price increases are considered and approved by the California Department of Insurance.
As California insurance premiums continue to rise, costs across the board are also increasing, with experts warning that California is facing an insurance availability crisis. Over the past two years, due to soaring wildfire risks and reconstruction costs since 2017, dozens of insurance companies have exited the California market.
In an August press release, Insurance Commissioner Ricardo Lara stated, “Consumers are being harmed, businesses continue to lose coverage, and wildfires are ravaging our state – we no longer have the luxury of time.” He urged insurance companies to submit more thorough rate review applications to expedite the approval process. The department is also hiring additional staff to facilitate reviews.
Governor Newsom echoed Lara’s sentiments in the same press release, saying, “We have been working closely with the Insurance Commissioner and fully support his actions… to ensure that Californians have access to adequate insurance and address market withdrawal actions that harm consumers.” He added, “These are necessary actions to address the California insurance crisis.”