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Catastrophe prices lead some to forgo cover

Catastrophe prices lead some to forgo cover

There have been few natural catastrophes in the United States since early 2006, but you wouldn't know it by talking to public entity risk managers seeking catastrophe coverage in earthquake and hurricane-prone areas.

Public entity risk managers in California and the Gulf Coast, including Florida and Louisiana, still face high rates and tight capacity, although East Coast risk managers report some relief this year (see story, page 16).

In response, some risk managers--particularly in California--are not purchasing any catastrophe coverage.

Other risk managers are developing creative solutions to get coverage, while self-funding is an option as well (see story, page 18).

Susan Blankenburg, vp, public entity practice for Marsh Inc. in San Francisco, said California public entities "have a very difficult time trying to understand why they were being punished" for Florida's hurricanes when California has not had major cat losses.

"But what the marketplace is doing is really putting all cat perils into one pot. So to a certain degree," California public entities are subsidizing hurricane-damaged areas, said Ms. Blankenburg.

"Our public entities bought what they felt they could and, actually in a lot of cases, probably bought more than what they had in their budgets," she said.

However, John Chino, senior vp for Arthur J. Gallagher & Co. in Aliso Viejo, Calif., said most California public entity risk managers are not purchasing earthquake insurance. He said he has just one client still buying the coverage.

Mr. Chino said the biggest factor differentiating public agencies and commercial entities "is that public agencies have this perception that (the Federal Emergency Management Agency) is going to bail them out, because in the event of an earthquake, the county would be declared a federal disaster (area), and they are in line for that kind of disaster relief."

In some cases, not buying cat coverage is nothing new.

The San Francisco Unified School District has never had earthquake insurance because of its cost, said Matt Hansen, director of risk management. "We want to perform our due diligence with the public's money because that's our money, but we do have a track record for working well" with FEMA, including following the 1989 temblor in which district property sustained moderate damage, he said.

Anaheim, Calif., stopped buying earthquake coverage about six years ago, said Tom Vance, the city's risk manager.

"We do look at the cost each year, but we don't think it makes any sense to spend taxpayers' money on it when it seems prohibitively expensive for the limits you get, given the deductibles and everything," said Mr. Vance.

Instead, the city plans to look to FEMA and California's Office of Emergency Services to rebuild public facilities in the event of an earthquake, he said.

Others are just paying the higher rates.

Manhattan Beach, Calif., studied whether the city should eliminate coverage on certain buildings, but found that "for every million dollars of building value that we take off our schedule, we'd only be saving $5,000 worth of premium, which is insignificant in the bigger scheme of things," said Howard Fishman, the city's risk manger.

"We just didn't feel that the savings that would be generated warranted the risk of not having earthquake (coverage) on several of our buildings," said Mr. Fishman. The city also concluded it was not worthwhile to increase its deductibles.

Mr. Fishman noted Manhattan Beach lies on the Inglewood earthquake fault line, which puts it at relatively high risk of significant earthquake damage. He said another consideration is the "liquefaction factor," in which structures built over sand basically "sink" during a severe earthquake.

"Is there a good solution to the problem? No," said Mr. Fishman. "All you can try to do is go through the exercise" of trying to reduce premiums.

In Manhattan Beach's case, "Unfortunately, we're between a rock and a hard place," he said. "We swallowed hard" and paid higher rates.

Some observers say the situation in Florida has eased faster than California. There is more uncertainty associated with an earthquake than a hurricane, said David L. Marcus, co-managing director of Gallagher's public entity and scholastic division in Boca Raton, Fla.

"You can at least prepare for a hurricane. You just can't prepare for an earthquake, so I think a lot of that is in the minds of an underwriter and some of the capacity that probably had been written on the earthquake side" has moved to Florida, he said.

New cat modeling programs that "shed a new light on predictability" have contributed to insurers' wariness about providing earthquake coverage, said Julie Theirl, risk manager for the city of Pomona, Calif.

"My expectation is, it's really a time lag," said David Bradford, executive vp of New York-based industry analyst Advisen Ltd. California rates will "tumble" also, he said.

However, Marsh's Ms. Blankenburg said she has seen an improvement in California's earthquake market, with rates being flat and some additional capacity.

"This current renewal is slightly better than we had last year. Is it anywhere close to what we had in prior years? Absolutely not," Ms. Blankenburg said.