THERE'S BEEN A LOT OF PRESS lately about discoveries suggesting a far higher risk of a major Northwest earthquake than was previously suspected. But with such megaquakes occurring on average every 500 years—plus or minus 200 or so—nobody's seen much reason to change lifestyles. Now that's about to change—with a jolt that hits right in the pocketbook.
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On January 15,Washington insurance commissioner Deborah Senn authorized Seattle-based PEMCO Insurance to boost its rate for earthquake-damage endorsements in the core Puget Sound area from $1.27 to $2.13 per $1,000 of covered value, raising quake coverage for an average Seattle home from about $200 to $300 per year. Everything points to other insurance firms falling in line, and to more rises in the future.
The real surprise is how long the rate change was in coming. More than a decade ago US Geological Survey scientists like Tom Heaton and Brian Atwater published research showing that earthquake risk in the Pacific Northwest had been grossly underestimated. By 1992 it was known that the supposedly quiescent "Seattle Fault," which cuts across the Sound at the latitude of the Kingdome, moved—a lot—as recently as 1,000 years ago.
What restrained insurance companies from jacking up rates long ago was not uncertainty about earthquake science; it was certainty based on bitter experience that quake insurance is a political can of worms. Back in 1984, the California Legislature passed a bill requiring any insurance company doing business in the state to offer earthquake coverage in every home policy it wrote.
When the Northridge quake of January 1994 hit an area of Los Angeles with no known faults, insurers took a terrible bath. "We lost everything we've ever made nationwide on quake insurance in that one quake," says Safeco's Pete Myers. State Farm's Dan Hattaway says his company's bill for Northridge to date totals $3.7 billion—"and it's not all costed yet." With both a headline-hungry insurance commissioner and consumer-advocate groups lambasting them, insurers discovered they were in a no-win game. Some, like State Farm, refused to write any new home policies until they could choose risks and set rates that allowed at least a chance of profit.
THE PROBLEM FOR ALL SIDES is that North America's recorded earthquake history is just too short for reliable prognostications. This is acutely the case in the Pacific Northwest, where the only two recorded quakes of consequence, in 1949 and '65, caused little damage or death.
"With car insurance, for example, we have a history to build on," says Chris Jahrman, underwriting manager for Seattle-based PEMCO. "We know with great certitude based on past experience how much we're going to have to pay out in the future. When it comes to earthquakes, and other natural disasters for that matter, we don't have that kind of data to draw from. Until about five years ago, when we began trying to assess hazards in this area for ourselves, we relied on tables developed for the country as a whole. Those rates hadn't changed for almost three decades." Given the United States' short history of European habitation and infrequency of quakes, those tables weren't much better than guesswork anyway.
But in the last 10 years the insurance industry has been hammered by losses from too many "hundred-year hurricanes" and "thousand-year floods" to wait patiently for reliable data. It is rethinking its whole approach to natural-disaster insurance. When the new standards developed by actuaries at the industry's own Insurance Services Office come into force in June or July this year, people a long way from the Pacific coast may encounter an unpleasant surprise opening their homeowner policy renewal letters. (It's often forgotten that North America's biggest recorded quake occurred in 1821 beneath the little southeast Missouri town of New Madrid, not far from the seismically placid center of the country.)
Caught between covering imponderable risks and raising rates to a safe but astronomical level, insurers are trying some new approaches. In California the standoff was resolved in late 1995 with the creation of the California Earthquake Authority, a quasi-governmental agency specifically created to underwrite home quake insurance for state residents. Participating insurers promise to route all the coverage they write through the CEA and contribute to its assets in proportion to their size, thereby sharing the risk of catastrophe.
A company like PEMCO, doing business only in one state, can't lay off a portion of its bets that way, which explains why PEMCO is the first company to apply to the insurance commissioner for a rate hike. But when the new national standards emerge this summer, it's safe to assume that the big national companies will follow suit.
IS THERE ANYTHING homeowners can do to cover their asses without bankrupting themselves? For the handy and dedicated, the answer is yes. Two weeks ago a panjandrum from the Federal Emergency Management Agency blew into town to announce Project Impact: a $1 million grant from FEMA to help local authorities deal with disaster. A million may not sound like much, but it's producing a good deal of activity. Sometime this summer the Seattle Department of Construction and Land Use hopes to have a building-retrofit kit available for homeowners. Modeled on a similar kit first distributed in California, the package will include a hazard inventory, retrofit planner, and provisions to expedite permit approval.
Those who don't want to wait until summer to address their retrofit concerns can jump the gun by signing up for a do-it-yourself retrofitting course through the Phinney Neighborhood Association's 21-year-old Well Home program. Director Roger Faris wants to see 1,600 quake-savvy homeowners in the field talking up the program by this time next year.
The best news of all may be that the insurance business is developing its own program to analyze progress in retrofitting older homes; this will eventually yield lower rates for people who make their homes safer in case of quake. People who don't are a hazard to neighbors as much as to themselves. Older homes not securely bolted to their foundations and without internal "shear walls" to prevent buckling can be thrown completely off their bases in a severe quake. "In Northridge we saw houses so damaged this way that they were completely unrepairable," says State Farm's Hattaway. "But what's worse is that when a house is shoved 2 or 3 feet off its foundation, pipes break, electrical wiring snaps, which can create tremendous damage for other property in the vicinity."
But one way or another, insurance is going to loom larger for property owners in general. Contractors can't build in quake-sensitive areas like the Seattle waterfront and on steep view properties without taking expensive professional advice from soil and structural engineering consultants. That makes buildings more expensive per insurable square foot. And someone's got to pay the tidy fees charged insurers by the likes of Risk Management Solutions, a high-tech spinoff of Stanford University offering those who can afford it world-class consultation on all matters disastrous. Once again it's proved: Ignorance is bliss; knowledge will cost you.
The Phinney Neighborhood Association's Well Home Program