Northridge earthquake (1994)
A magnitude 6.7 earthquake that hits Los Angeles on January 17, 1994: an insured loss of about twelve billion dollars, which led insurers to leave residential earthquake cover and California to create the earthquake authority.
On January 17, 1994, at 4:31 a.m., a magnitude 6.7 earthquake shakes the San Fernando Valley, north of Los Angeles, on a blind fault no one had mapped. Fifty-seven people die, freeways collapse, and insured damage exceeds twelve billion dollars, mostly on single-family homes. California law had required homeowners insurers since 1985 to offer earthquake cover to each policyholder, and many had included it without pricing it at its risk level. The loss, which surprised by its size, led insurers to refuse new homeowners contracts in California, for fear of having to include earthquake. The market stalled. In response, the state created in 1996 the California Earthquake Authority, a public mutual funded by insurers, which has since offered earthquake cover with a high 15% deductible. For reinsurance, Northridge changed how things are measured. The hidden fault brought out the difference between the earthquakes one knows about and those one does not see, pushed fault and soil modeling, and left a lasting lesson: mandatory cover not priced at its cost shifts the loss onto the insurer, then onto its reinsurer.
Textbook case. Homeowners insurer with 5% of the California market and 15,000 policyholders in the valley. Gross Northridge loss of USD 260M, or 2.1% of the USD 12bn market. Its per event excess of loss treaty of USD 150M excess of USD 100M pays USD 150M; it keeps its USD 100M retention and the USD 10M above the layer, which weighs on its capital. It stops writing new homeowners policies in California until the law changes, as most of its peers did.
Northridge earthquake, Northridge 1994, 1994 Los Angeles earthquake, Northridge insured loss
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