Why are earthquake insurance premiums rising?

Twenty-five years ago, when Jason Ginder started selling insurance for the Missouri Farm Bureau, adding earthquake protection to his clients' coverage wasn't just a question.

“The prices were so low, I didn't even ask people. I just put it in their policy,” he said.

In 2000, more than 60% of homes around New Madrid, Missouri had earthquake insurance. But now, it's only about 10%. Additionally, the average cost of earthquake premiums increased from $57 annually to $569 in 2023.

Other parts of the country are witnessing the same trend. In the wake of the Palisades fire in California and recent hurricanes in Florida, homeowners' insurance premiums for some in those states could rise by more than 30%.

That is if homeowners can get coverage. Many private companies are leaving the market due to increasingly high disaster risks.

But the last major earthquakes to hit southeast Missouri were in 1811 and 1812, so why are insurance premiums so high today?

“Maybe it's just because of the risk,” Ginder said.

It has traditionally been difficult to predict earthquake hazards in areas that don't hit often. But the thing that has caused this rise in insurance premiums is a change in how insurance companies design for those risks.

“The models that insurance companies use, the statistical models, are becoming more reliable,” said Michael R. Powers, a retired Tsinghua University professor who studies the international insurance market.

“They found they had to be more careful,” he added.

He said the models have improved due to improved seismic equipment and clearer satellite images. In Missouri, the risk of a major earthquake has risen to 7 to 10 percent within the next 50 years.

With the new data, insurance companies are raising rates to make sure they have enough money in reserves to pay claims if or when an earthquake occurs. This can set off a feedback loop when the price of insurance rises.

“Some customers might say, ‘Oh, I don’t want this anymore, it’s too expensive,’” said economist Hong Li, who studies insurance at the University of Guelph in Canada.

These clients have less need for insurance — they may think their home is solid — so the cost of higher insurance premiums isn't worth it to them, Lee said.

When these homeowners withdraw, the insurance pool contains a higher proportion of risky properties, and companies make lower profits to guard against higher future payouts. Therefore, insurance providers have become more risk averse.

“You have to update your model, update your reserve, update everything, and then increase the price,” he told me.

This causes homeowners to drop their policy, and the cycle begins again. Premiums rise, homeowners drop coverage, and prices rise again. That's why it's a spiral.

There are ways in which the government can intervene. For example, most states have an “insurer of last resort” program that provides coverage to residents who struggle to obtain insurance in the private market. This coverage still costs homeowners tens of thousands of dollars. Missouri has a program like this for home, farm and pothole protection, but not for earthquakes.

There is no urgency. Donnie Brown, a former New Madrid state legislator, says there's a perception that coverage is unnecessary.

“Well, we haven't had a major catastrophe in over 200 years,” he said. “So, you know, this will probably never happen.” “It's kind of out of sight, out of people's minds.”

However, even in places where disaster risks are clear and hurricanes or wildfires are common, the insurance market is on shaky ground. And it will get worse if more homeowners drop coverage.

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