Californians to Face Higher Earthquake Insurance Rates in 2025

The California Earthquake Authority, a not-for-profit organization funded by insurance companies and overseen by the state, is set to increase rates by an average of 6.8 percent in January 2025. The organization is committed to making earthquake insurance as available, reliable, and affordable as possible, but state law requires the rates to be actuarially sound.

Why the Increase?

The reasons for the rate increase include inflation, higher construction costs, and the price of reinsurance, which is coverage that insurers purchase to help pay claims. Policies are sold through 20 member companies affiliated with the earthquake authority. To get earthquake insurance, you must have a homeowner or renter policy with the company that offers the additional coverage.

Impact on Policyholders

The annual rates are expected to increase by less than $10 for renters and about $70 for homeowners. However, some policyholders will see higher or lower adjustments. The changes also include a new $500 sub-limit for broken personal property, including glassware, pottery, and certain other items, at no additional cost.

Earthquake Coverage in California

In California, standard homeowners, renters, and condominium insurance policies do not cover damage caused by earthquakes. Mortgage lenders generally do not require earthquake coverage, although most mandate homeowner policies to cover other damage. The state accounts for about 90 percent of earthquakes nationwide, and about 10 percent of Californians carry insurance to cover damage, according to the Federal Emergency Management Agency.

Why Some Californians Avoid Earthquake Insurance

Some homeowners and renters avoid earthquake insurance because of policy dynamics. Most homes would not experience damage that costs more than insurance deductibles, leaving them paying for premiums without receiving aid in the event of a disaster. Approximately one million Californians have policies with the earthquake authority, representing a fraction of the state’s homeowners and renters.

Seismic Safety Upgrades

The earthquake authority has advised policyholders that they could be offered rate reductions of up to 25 percent if they retrofit their homes with seismic safety upgrades. Homes most at risk of earthquake damage include those with raised foundations, post-and-piers, built on hillsides, with living spaces built over garages, and manufactured homes that are not built with seismic safety braces.

History of the Earthquake Authority

The earthquake authority was founded after the Northridge earthquake in January 1994, which resulted in approximately $20 billion in residential damages. The event significantly impacted the insurance market, as the industry had underestimated the financial impact of moderate to large earthquakes. To stabilize the housing and insurance markets, the Legislature created the Earthquake Authority in 1996 to sell insurance through a variety of partner companies.

Insurance Rates Rising Across the Board

The premium cost increase comes as insurance rates are on the rise across the board in California. The state is facing an insurance “availability crisis,” with dozens of insurers having fled the market over the last two years as wildfire risks and rebuilding costs have skyrocketed since 2017.

Efforts to Address the Crisis

Efforts are being made to address this crisis. The insurance department is hiring more staff to facilitate review and expediting the approval processes. The Commissioner of the insurance department, Ricardo Lara, has issued a bulletin calling for more complete rate review applications from insurers.

Bottom Line

The increase in earthquake insurance rates in California is a reflection of the broader challenges facing the state's insurance market. As the risk of natural disasters continues to grow, the question of how to ensure affordable and comprehensive coverage for residents becomes increasingly pressing. What are your thoughts on this issue? Do you think the increase is justified? Share this article with your friends and let's get the conversation started. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.