Catastrophe Risk

California Earthquake Insurer’s Retrofit Plan Will Strengthen Buildings and Reduce Premiums

California intends to have its retrofit proposals adopted into building codes that could boost building resiliency nationwide.
By: | August 30, 2018 • 8 min read

The California Earthquake Authority (CEA) is set to publish a document incorporating the latest risk modeling for retrofitting the most vulnerable types of structures to gird them against quake damage.


“We are creating this document as a pre-standard,” said Janiele Maffei, chief mitigation officer for CEA. “It is written in building-code language with the intent to have it adopted across the country.”

Los Angeles, San Francisco, Portland, Vancouver and Anchorage are all on or near the “Ring of Fire,” a girdle of subduction zones around the Pacific Ocean where some crustal plates are being driven under others. That causes volcanoes and earthquakes.

All of those cities, and dozens more, face similar hazards but address them in different ways. Los Angeles and San Francisco have mandated retrofits. Local reports in the Seattle area detail how similar efforts have gotten bogged down in socio-economic, tax and land-use issues.

Maiclaire Bolton-Smith, seismologist and senior leader of research for CoreLogic, explained there are areas of the Oregon and Washington coasts that have a very high earthquake hazard but have relatively low risk, because they are essentially wild lands with few structures or population.

Janiele Maffei, chief mitigation officer, California Earthquake Authority

Seismic retrofitting is adding structural reinforcement to buildings to make them better able to withstand earthquakes. It has emerged as economical and effective risk mitigation, especially for older homes and other small structures that were built to code decades ago but would not be compliant if built today.

The most vulnerable type of structure throughout California is one with a ‘soft story,’ a garage or retail space on the ground floor and living or office space above. The grim toll of the 1994 Northridge Quake and the 1989 Loma Prieta Quake graphically demonstrated that those open, unsupported soft stories collapse easily.

The second type of vulnerable structure in California is the hillside or hilltop home. The third, which is most common in the Los Angles area, is the ‘cripple wall,’ the short vertical box, usually made of wood, that encloses a crawl space under the first floor.

“The low-hanging fruit is the cripple wall,” said Maffei. “In an earthquake, those tend to topple and the house slides off its foundation. Often that results in a total loss for insurance purposes, because even if the rest of the house is not badly damaged, it still has to be lifted back onto the foundation and then repaired and reconnected.”

That can take months, during which loss-of-use coverage is in effect.

Using Data from Updated Quake Models

Maffei explained that building codes from the late ’70s added bolt-and-brace rules for all new cripple walls but did not mandate retrofitting. Since its inception, CEA has offered a five percent discount to homeowners that make seismic retrofits, which homeowners verify themselves. Under the authority’s annual rate and form filing for 2019, it has sought to replace that discount with a 15 to 20 percent discount for retrofits done and verified by certified contractors.

“Walking around San Francisco, it is easy to see the enormity of the challenge with soft stories and hillside structures,” said Andrew O’Donnell, senior engineer at risk-modeling firm AIR Worldwide. “My job as a researcher and our job as risk modellers is to allow our clients, like CEA, to draw their own conclusions based on the science and the engineering we present.”


He noted there is danger in the apparent lack of danger.

“The last major event was Northridge, more than 20 years ago. That means a whole generation of homeowners have never lived through a major event. The biggest challenge is risk communication. To them, it is abstract. To us, it is very real,” he said.

In July 2017, AIR released a new catastrophe risk model to be used by insurers and government agencies.

“It was the most comprehensive update ever,” said O’Donnell. It included detailed mapping of the Uniform California Earthquake Rupture Forecast and the most recent hazard maps from the U.S. Geological Survey (USGS).

 “The last major event was Northridge, more than 20 years ago. That means a whole generation of homeowners have never lived through a major event. The biggest challenge is risk communication. To them, it is abstract. To us, it is very real.” — Andrew O’Donnell, senior engineer, AIR Worldwide

CEA is working with the Pacific Earthquake Engineering Research Center, which is affiliated with the University of California at Berkeley, to quantify how much reduction in damage there is with a result of brace-and-bolt retrofitting.

“We are doing materials testing and computer analysis to generate damage functions that we are going to give to our three risk-modeling partners, AIR, CoreLogic, and RMS,” said Maffei. We expect the reduction in premium could be more like 25 percent. That work started last year, and we expect to have results next year.”

In terms of retrofitting, “different local tectonic environments create different types of hazards. Hazards vary with setting,” said Keith Knudsen, deputy director of the USGS’s Earthquake Science Center. “It matters how far away the earthquake is, what type and magnitude it is, what type of construction and foundation a structure has, and what type of soil and rock are under the foundation.”

Maffei noted new data for the models, including age, number of stories, and whether there is a basement or crawl space, was not readily available from carriers writing traditional homeowner policies, because the primary concern was fire, not earthquake.

It is important to remember in all of this that “we are getting better at building,” said Bolton-Smith.

“Year on year, codes get better. Every six years or so the USGS issues new seismic hazard maps. We transform those hazard maps into risk vulnerability models.

“The insurance and reinsurance sector can take our risk modeling into consideration as they make their capital allocations of reserves against claims and also in their underwriting and pricing,” she said. “The key is being able to apply the data coming from the USGS and other sources.”

Science Informs Policy Crafting

“We participate in and inform policy discussions, but we don’t make policy,” said Knudsen. “We help policy organizations understand hazards and help engineers and regulators mitigate hazards.”


California has long mandated that underwriters offer earthquake coverage with homeowner policies. After massive losses in the wake of the 1994 Northridge Quake, premiums increased tenfold, and insurers were going to leave California, so Sacramento created CEA as a “public instrumentality of the state.”

That quake, magnitude 6.7, killed 57 people and injured thousands. It damaged 112,000 structures and caused more than $20 billion in property losses. More than 20,000 people were displaced.

CEA is the primary insurer for the earthquake cover that becomes part of retail homeowners policies offered by more than two dozen commercial carriers, which act as managing agents and collect premiums on behalf of CEA. The authority holds the risk. The commercial carriers assess claims and CEA makes payments.

As with any major underwriter, CEA makes extensive use of the reinsurance market. It would prefer to use those funds to broaden coverage. “We are working on legislation to reduce our payments for reinsurance,” said Maffei, “and to change our structure to post-event funding. That could free as much as $50 million, double our current fund and ten-times our current annual outlay.”

CEA has a loss-mitigation fund from which can be spent as much as five percent of the investment income, or $5 million, whichever is less. Since inception at the end of 1996, CEA has written about a million policies. It has a grant program that provides $3,000 toward retrofits through a lottery program that has focused on the areas of highest risk and vulnerability. About 5,700 retrofits have been completed.

Cost and Availability of Retrofit Programs

For a simple bolt-only retrofit in the Los Angeles area, the grant could pay for the whole project. Full bolt and brace could be $4,500. In the San Francisco area, bolt-only runs about $4,000 to $5,000; bolt and brace $5,000 to $7,000. CEA maintains a list of authorized contractors in an effort to prevent fraud and corruption.

“There is no such thing as earthquake-proof,” cautioned Maffei. “But we can significantly reduce the risk of houses sliding off their foundations.”

In 2015, the Los Angeles Department of Buildings and Safety (LADBS) adopted ordinances requiring the retrofit of pre-1978 wood-frame soft-story buildings and non-ductile concrete buildings.

Maiclaire Bolton-Smith, seismologist and senior leader of research, CoreLogic

As of August 1, LADBS has identified about 12,800 buildings that qualify for the soft-story retrofit program.

Property owners have a fixed amount of time to comply: Two years to submit proof of previous retrofit or plans to retrofit or demolish; three and half years to obtain a permit to start construction or demolition; and seven years to complete the work.

Of those 12,800 structures, only 44 percent comply with the two-year time limit for submitting plans for retrofit, just 19 percent comply with the 3.5-year time limit to obtain permits. A mere 8 percent comply with the seven-year time limit for completion.

The non-ductile concrete retrofit program applies to vulnerable buildings with a roof and/or floor supported by a concrete wall or concrete column, constructed before January 13, 1977.

Owners of those buildings have three years to submit a completed checklist for review; 10 years to submit proof of previous retrofit or plans to retrofit or plans to demolish the building; and 25 years to complete work. LADBS is still in the process of identifying the concrete buildings subject to the ordinance.


The bureau estimates the cost to retrofit apartment buildings with more than three units is up to $8,000 per unit. Notably, the ordinance does not apply to single-family homes.

There is no estimate for commercial buildings. Property owners can contact the California Capital Access Program on the California State Treasurer’s website for information about financial assistance programs.

Knudsen at USGS noted that this is the 150th anniversary of the last major quake on the Hayward Fault, which runs roughly parallel to the California coast from east of San Jose up through Oakland and Berkeley.

Regardless of quiescence for a century and a half, or just a generation, “people need to find out about the buildings they live and work in,” he said. “People need to ask if the building is safe.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance


Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”


“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.


“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?


“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.