Columbus-based Nationwide Mutual Insurance Co. in September stopped writing property insurance policies in Florida, and this month will begin dropping 35,000 homeowners policies that come up for renewal in the hurricane-prone states, spokesman Joe Case said.
Major Insurer Dropping Earthquake Coverage Nationwide
March 24, 2006
by Adrian Burns
Business First of Columbus
The chance of a major earthquake hitting Ohio may be low, but it's not remote enough for one major insurer.
Allstate Insurance Co., battered over the past 15 months by seven of the 10 most-expensive catastrophes in the company's history, is taking steps to reduce its exposure to disasters by discontinuing writing residential and commercial earthquake coverage in most of the nation, including Ohio. The company also is planning to shed some of the 407,000 earthquake policies it has in force nationwide.
"What we're doing is a prudent action to reduce property exposure to catastrophic events," Karen Spica, a spokeswoman for the Chicago-based company, told Business First.
Allstate's decision this month halted the writing of earthquake coverage, which costs a homeowner 20 cents to 40 cents per $1,000 of a residence's value. The company also is trying to find another insurer to pick up its roughly 300 commercial and 17,000 homeowners earthquake policies in the state, said Mike McGraw, Allstate's product manager for Ohio, Indiana and Michigan.
Ohio Insurance Department spokesman Robert Denhard said he was unaware of any other companies dropping earthquake coverage.
Although quake coverage is one of the smallest segments of the property and casualty market in Ohio, it accounted for $26.7 million in written commercial and residential premiums in 2005, compared with $65.1 million for private and small commercial aircraft insurance, $1.8 billion for general homeowners policies and $5.3 billion for auto insurance.
'The big one'
Ohio may be thousands of miles from the hurricane-ravaged South, but its disaster risks figure into the overall exposure equation for insurers, said Robert Hartwig, chief economist for the Insurance Information Institute, an industry research group.
"What's happening in Ohio with earthquake coverage is actually related to hurricane exposure," he said. "It all accumulates at the corporate level at the end of the day."
And Ohio has done its share of shaking, including five small quakes this year in northeast Ohio. There have been several damaging quakes in the state during the last century, the most recent in January 2001, when a 4.5-magnitude quake rocked Ashtabula County, according to the state Department of Natural Resources' Ohio Seismic Network.
More severe earthquakes are possible in Ohio, but such temblors typically have long intervals between recurrences, making them hard to predict, said Mike Hansen, the seismic network's coordinator.
"We don't know where we are in that cycle," he said. "The big one could be tomorrow or 200 years from now."
Allstate has been among the most aggressive insurers in reducing disaster exposure. The company recently said it was cutting back on homeowners policies in New York, on adjacent Long Island and in parts of Texas.
But it's not alone, Hartwig said. Columbus-based Nationwide Mutual Insurance Co. in September stopped writing property insurance policies in Florida, and this month will begin dropping 35,000 homeowners policies that come up for renewal in the hurricane-prone states, spokesman Joe Case said.
George Haenszel, executive vice president at the Professional Insurance Agents Association of Ohio Inc., a trade group for insurance agents, said Allstate's quake policy-reduction decision came as a surprise. The purpose of insurance is to provide protection from catastrophes, he said, so earthquake coverage.
"Are they in the business of risk or aren't they?" he said.
Allstate's Spica said the issue is more about consequences, as insurers get slammed with larger disaster tolls.
"The current insurance model is not well-suited for handling losses from low-frequency, high-severity, mega-catastrophic events," she said.
One such event was Hurricane Katrina, which saddled Allstate with a company-record $3.6 billion in catastrophe losses. An earthquake costing Allstate billions of dollars more would take the company decades to pay off, based on the $60.2 million in annual earthquake premiums it collects nationally, Spica said.
"When they happen, it's a high severity and it's very difficult to bring in enough to cover the cost," she said.
But no residential insurer with a national presence can completely avoid dealing with earthquakes. In California, where in 2003 residential premiums alone totaled $661 million, companies offering homeowners insurance are required to provide access to an earthquake policy, said Nancy Kincaid, a spokeswoman for the California Earthquake Authority.
Allstate is among 18 insurers that sell and service earthquake coverage that is owned and funded by the authority, which through a combination of premiums, payments into the system by insurers and reinsurance is capable of handling claims from two simultaneous major earthquakes, Kincaid said. Other insurers in the state choose to offer their own policies, she said.
Allstate's main concern in the Midwest is the New Madrid seismic zone near the intersecting borders of Tennessee, Kentucky and Missouri.
In 1811 and 1812, three powerful earthquakes occurred in that seismically unstable area, according to the U.S. Geological Survey. The magnitude 8 quakes resulted in land upheaval, causing church bells to ring as far away as Boston and inflicting significant damage to structures in Cincinnati, Geological Survey reports said.
The agency predicts a greater than 90 percent chance of a magnitude 6 or 7 earthquake in the New Madrid area during the next 50 years. The Ohio Seismic Network's Hansen, who admits he does not have personal earthquake coverage, said the danger of such a severe quake in Ohio is low.
"But on the other hand," he said, "it's not zero either."