Topics. Why earthquake insurance? Earthquake insurance nuts and bolts Recent challenges and Insurance Department response Where do we go from here?

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2 Topics Why earthquake insurance? Earthquake insurance nuts and bolts Recent challenges and Insurance Department response Where do we go from here?

3 Why Earthquake Insurance? Earthquake damage is typically not covered by an unendorsed homeowners, renters, or commercial property policy To recover from a catastrophic loss

4 Homeowners Exclusion

5 Why exclude earthquake damage? Standard policies are built around known, statistically predictable perils faced by most, if not all, policyholders Earthquakes are a unique risk concentrated in known locations o Much like floods Earthquake damage can be catastrophic

6 Top 5 most costly natural disasters 1. Tohoku earthquake and tsunami, Japan (2011) $235 billion (by the World Bank) 2. Kobe earthquake, Japan (1995) $100 billion (by the World Bank) 3. Hurricane Katrina, U.S. (2005) $81 billion (by NOAA) 4. Northridge earthquake, California, U.S. (1994) $42 billion (by NOAA) 5. Sichuan earthquake, China (2008) $29 billion (by the World Bank)

7 Top 5 most costly natural disasters 1. Tohoku earthquake and tsunami, Japan (2011) $235 billion (by the World Bank) 2. Kobe earthquake, Japan (1995) $100 billion (by the World Bank) 3. Hurricane Katrina, U.S. (2005) $81 billion (by NOAA) 4. Northridge earthquake, California, U.S. (1994) $42 billion (by NOAA) 5. Sichuan earthquake, China (2008) $29 billion (by the World Bank)

8 Nuts & bolts residential coverage Dwelling o Limit usually the same as HO dwelling coverage o Deductible of 2% - 15% Personal property o Limit usually low, such as 10% of the dwelling coverage Additional living expenses / loss of use o Temporary rental of a home or hotel; meals; etc. o Low limit Debris removal

9 Nuts & bolts residential coverage Typically not covered: o Fire (covered by HO policy) o Landscaping / damage to land (sinkholes) o Fences, pools, & separate buildings o Brick / stone / masonry (varies by company) o External water damage from flooding or sewer back up o Vehicles Additional available coverages: o Building code upgrade or land restoration Cost: $50 - $300 per year

10 Nuts & bolts commercial coverage Building damage Business property such as inventory Lost business income High deductibles: 2% - 20%

11 Recent challenges and OID response Oklahoma on the national stage Preexisting damage exclusions Specialized training of earthquake adjusters Man made earthquakes Market competition

12 Commissioner Doak s national role Aug Center for Insurance Policy and Research Forum All Things Earthquake NAIC s Earthquake Study Group

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14 Preexisting damage exclusions Preexisting damage not covered o Oklahoma has a problem with soil settling Insurers have a right to inspect the property Important for insurer to know the condition of the insured property at the inception of coverage and throughout the policy term Single covered event

15 Preexisting damage exclusions Bulletin No. PC (March 3, 2015): How can a company know the damage is preexisting if it has not inspected the property?

16 Training for earthquake adjusters Coverage may not be well understood Provisions differ from traditional HO policies Complex application of the limits and deductibles Man made earthquakes complex questions of fact related to causation Type of damage caused by earthquakes requires technical expertise to evaluate o Settling vs. earthquake damage

17 Training for earthquake adjusters Bulletin No. PC :

18 Agent/adjuster education Since 2014, all licensed property agents and adjusters are required to obtain 1 hour of continuing education on earthquake insurance.

19 Man made earthquakes Does not include man made causes of shaking, such as construction, mining, and oil and gas exploration and production. So is an earthquake triggered by wastewater injection covered?

20 Man made earthquakes October 20, 2015: Bulletin No. PC insurance companies ordered to issue a clarifying notice to all earthquake insurance policyholders:

21 Result: only 16 companies do not cover earthquakes resulting from causes listed in the Bulletin. Consumer education and comfort Market forces Man made earthquakes

22 A competitive market is presumed to exist for P&C insurance, unless the Commissioner declares otherwise. Factors to consider: o Number of insurers writing o Market shares and changes in market shares over time o Barriers to entry o Market concentration Market competition o Reasonableness of long-term profitability o Insurers costs and revenue over time

23 If a market is competitive o Use and file rate filing o Rate cannot be determined to be excessive If a market is noncompetitive o File and use rate filing o The Commissioner may reject a rate as excessive if it is likely to produce a profit that is unreasonably high for the insurance provided. 36 O.S. 985(A)(1) Data call Market competition

24 Market competition Companies Writing Earthquake Insurance in Oklahoma Companies Writing Earthquake in Oklahoma

25 Market competition Concentration of personal lines market share since Travelers Indemnity State Farm Farmers Ins. Co Lexington CSAA/ACA Liberty Mutual USAA

26 Market competition Personal lines earthquake insurance claims since Paid Claims Claims

27 Personal lines earthquake insurance premium and claims data 1/1/2010 8/19/2016: o $135,434,096 collected in premiums o 1,133 total claims o 212 claims paid o $4,487,629 paid Market competition Since Aug. 2014: 12 rate increase filings ranging from 4% to 300% Generally not substantiated with objective criteria such as adverse experience, increased acquisitions cost, or cost of reinsurance

28 Market competition Public hearing May 24, 2016 June 6, 2016: Commissioner declares that a reasonable degree of competition does not exist in EQ insurance market File and use rate filing Rates can be rejected as excessive Data call continues (now quarterly)

29 Personal lines earthquake insurance premium and claims data 1/1/2010 8/19/2016: o $135,434,096 collected in premiums o 1,133 total claims o 212 claims paid o $4,487,629 paid Market competition

30 EQ insurance as catastrophic coverage: Northridge January 17, magnitude earthquake rocks California s San Fernando Valley on a fault no one knew existed. Costliest earthquake in U.S. history and 4 th costliest natural disaster in recorded world history. $40-$42 billion in losses, half of which were residential losses.

31 EQ insurance as catastrophic coverage: Northridge $10-$12.5 billion in insured residential losses : almost $4 billion paid in EQ premiums. One source: insured losses were substantially more than the amount of earthquake insurance premiums collected during the previous 80 years. CEA source: the losses amounted to far more than had ever been collected in premium.

32 EQ insurance as catastrophic coverage: Northridge California law: mandatory offer Within one year, 93% of the California HO insurers had either severely restricted or stopped writing HO policies altogether 1996 creation of the California Earthquake Authority, a not-for-profit, privately funded, publicly managed org that provides residential earthquake coverage. CEA provides 75% of California s EQ coverage

33 OK personal lines earthquake insurance premium and claims data /19/2016: o $135,434,096 collected in premiums o 1,133 total claims o 212 claims paid o $4,487,629 paid Market competition CEA 2015 premiums and claims: Written premiums: $634,442,394

34 OK personal lines earthquake insurance premium and claims data /19/2016: o $135,434,096 collected in premiums o 1,133 total claims o 212 claims paid o $4,487,629 paid CEA 2015 premiums and claims: Written premiums: $634,442,394 Claims paid: $5,878 Market competition

35 2016 legislative efforts SB1498 Earthquake insurers would be barred from denying coverage for man made causation. Insurers would retain the right of subrogation against at-fault parties. Two issues: o Some man made exclusions are necessary construction & mining o Insurers always retain the right to subrogation

36 2016 legislative efforts SB1497 Upon a finding there is a lack of adequate earthquake insurance coverage available to residents in the State of Oklahoma, the Insurance Commissioner is hereby empowered to create an earthquake re-insurance program, to be administered by the state.

37 Where do we go from here? Statewide building codes Insurance Institute for Business and Home Safety (IBHS) Fortified standards Gold, Silver, & Bronze o Bronze: roof o Silver: building openings o Gold: ties the house together continuous load path designed to minimize damage from an EF-2 or weaker tornado Moore building code designed to withstand up to 135 mph winds (EF-2)

38 THANK YOU Buddy Combs Director of Public Policy and Assistant General Counsel