California Earthquake Authority Revenue and Competitors

In January 1994, a 6.7-magnitude earthquake struck California’s San Fernando Valley. It was the costliest earthquake in U.S. history and occurred on a previously undocumented fault.Prior to Northridge, policymakers and insurance companies had dramatically underestimated the potential losses that would be caused even by moderate earthquakes, and California earthquake insurance premiums did not reflect the risk. Insurers and consumer groups quickly became aware that residential earthquake insurers were overexposed and would quickly exhaust their claims-paying resources if another significant earthquake occurred. By January 1995, fearing potential insolvency from another huge earthquake, insurers representing about 93% of the homeowners insurance market in California severely restricted—or refused to write altogether—new homeowners policies because of the law that they also offer earthquake insurance. This triggered a crisis that by mid-1996 seriously threatened the vitality of the state's housing market.