March 2009


When condominium associations purchase earthquake insurance, the pricing of the coverage always seems like somewhat of a mystery. How did they come up with those premiums?

Frankly, that’s true with the pricing of most insurance coverage.  How many industries are able to sell a product before they know how much that product is going to cost them?   The science of actuaries is, um, unperfected.  The loss may be tomorrow or a year from now – or may never happen at all.  And when the earthquake finally occurs, the extent of the losses is also anyone’s guess.   In anticipation of the next earthquake event, insurance carriers must rely on sophisticated earthquake computer modeling software to predict losses based on each risk’s soil type, proximity to known earthquake faults, et al.  
Carriers also look at known costs when pricing coverage.

Understanding how and why the insurance market fluctuates can seem daunting.

The greatest known cost (and, as a result, the greatest impact) is the insurance carrier’s cost of reinsurance.  When your Association purchases earthquake insurance from an insurance carrier, that carrier does not retain all the risk.   Instead, they share the exposure with secondary insurance companies called reinsurers.  This secondary line of insurance carriers (or risk backers) are willing to take on the exposure to loss in exchange for a premium.  In years when losses and demand are up, that premium can be quite hefty.  The primary carrier then, must pass this cost on to the condominium association.

Reinsurance carriers have had some serious supply issues this year.   The working capital from investors has dried up as a result of the meltdown of the financial sector and worldwide losses have had a significant impact.  The 2008 calendar year was a record setter:  the second worst year ever for catastrophe losses – at $50 Billion.

Demand is also up. Regulating bodies such as the various state Departments of Insurance, as well as rating companies such as A. M. Best and Standard and Poors – have advised insurance companies of their need to rely even more heavily on reinsurance to continue operating (and, in the case of the rating agencies, to retain their good rating). 

Exactly how this supply/demand pressure will impact pricing is yet to be determined.   Early indications:  earthquake pricing may increase by 10% to 20% this year.   Most of the reinsurance contracts (called “treaties”) renewed January 1, 2009, but some will renew July 1st.  As a result, some insurance carriers may have their pricing reflect the higher treaty costs immediately, while others may wait a few months.  As always, having your insurance agent or broker start as early as possible to make sure that he/she approaches all the available markets is a good idea.  When prices rise – your general membership is going to want to be assured that your agent/broker left no stone unturned.   Consider higher deductibles as a way to manage costs – and ask your agent/broker for a full marketing report – so you’ll know that you’re truly being offered the best possible deal.


Since 1900, earthquakes have occurred in nearly 40 states and have caused damage in all 50. It is estimated that 5,000 quakes can be felt each year.

A study by AIR-Worldwide estimates that if a quake similar to the 1906 San Francisco earthquake (7.9) were to hit under today's economic and demographic conditions, it would cause damages exceeding $100 billion.

1. 1994-Northridge, CA

  • 6.7 Magnitude
  • $29,000,000,000

2. 1989-Loma Prieta, CA

  • 6.9 Magnitude
  • $12,154,000,000

    3. 1964-Alaska (tsunami)

  • 9.2 Magnitude
  • $3,473,000,000

4. 1971-San Fernando, CA

  • 6.5 Magnitude
  • $2,940,000,000

5. 2001-Washington, OR

  • 6.8 Magnitude
  • $2,802,000,000
The 1994 Northridge, CA Earthquake registered a magnitude 6.7, killing 57 people and causing over $20 Billion dollars in damages.

6. 1987-Whittier area, CA

  • 5.9 Magnitude
  • $678,000,000

7. 1933-Long Beach, CA

  • 6.3 Magnitude
  • $662,000,000

8. 1952-Kern County, CA

  • 7.5 Magnitude
  • $487,000,000

9. 1992-Southern CA

  • 7.6 Magnitude
  • $141,000,000

10. 1992-Northern CA

  • 7.1 Magnitude
  • $101,000,000

*Source: U.S. Department of the Interior, U.S. Geological Survey; Munich Re; Insurance Information Institute.

*Includes insured and non-insured losses.


This letter contains only a general description of coverage and is not a statement of contract. For a more detailed description of the policy conditions and exclusions, please consult the policy itself.
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