By Daniel Gilbert

The Seattle Times

State Farm collected $350 million in premiums from Washingtonians over a decade by betting against earthquakes in the state. It concluded that wasn’t enough.

In 2014, the company filed documents with Washington state’s insurance regulator seeking approval to raise earthquake rates around the state, including by 39 percent for commercial property in King County and by 117 percent for Grays Harbor and Pacific counties.

A state insurance official called State Farm’s proposed profit “absurdly high” and objected to any rate increase, according to state records. But the regulator, negotiating on the public’s behalf, was at a disadvantage: Insurers in Washington don’t have to offer earthquake insurance if they dislike the terms, and State Farm is the state’s largest licensed provider of quake coverage.

When the company refused to back down, Washington’s insurance regulator approved the rate hike, as requested.

That lopsided negotiation is typical in Washington, where companies almost always get the earthquake rates they ask for, an examination by The Seattle Times has found. And it helps explain why Washington home and business owners either pay more to protect themselves against earthquakes, or, like most, choose to go unprotected.

Even many who are willing to pay the high rates are forced to get coverage through a riskier, loosely regulated market of insurers because the regulated carriers are allowed to pick and choose who they will and won’t cover.

Mike Kreidler, who has served as Washington’s elected insurance commissioner since 2001, acknowledged in an interview that his office can’t prove an earthquake rate is excessive. Insurers justify their rates with closely guarded computer models that they don’t share with regulators. Kreidler, whose office oversees the entire insurance industry in the state, said he lacks the staff and means to develop quake models, like California does.

Kreidler said his office doesn’t make inappropriate rate concessions and defended his handling of the State Farm case.

“We didn’t have anything we could really hang our hat on as to why we were uncomfortable,” he said. “I can’t go to court with that kind of an argument.”

State Farm, which generates roughly a quarter of all earthquake business regulated by the state, declined interview requests.

“The filings speak for themselves,” a company spokeswoman said. The 2014 filing relied on models that crunched data on earthquakes over thousands of years to simulate the company’s risk, citing potential losses that could be “solvency threatening.” Without a larger profit margin, the filing said, “there would be no incentive to write high-risk insurance.”

Kreidler’s office generally approves what companies ask for so they don’t stop offering earthquake coverage, as Allstate Insurance did a decade ago.

“The more you squeeze, the fewer you’re going to have,” Kreidler said. “So how hard do you squeeze?”

Market forces?

Kreidler said Washington state has a “pretty healthy market” of insurers and that the competition for customers helps keep earthquake rates in check. But state records show that just five companies account for more than half of all quake premiums collected by licensed insurers. Of the five, only State Farm and GeoVera Insurance offer residential earthquake coverage.

A requirement for insurers to offer earthquake coverage, like California has, could give Kreidler’s office greater leverage to negotiate rates. But state lawmakers have done nothing to address earthquake insurance since 1999, when they proposed requiring the commissioner’s office to publish information online about coverage options. The bill died in committee.

Such indifference could bedevil Washington after a major earthquake, said Howard Kunreuther, an expert on catastrophic risk and professor at the University of Pennsylvania’s Wharton School. The more people with earthquake insurance, he said, the faster that region will rebound after a disaster.

“They will get claims payments and not have to secure funding to rebuild their property from other sources,” Kunreuther said.

Yet most Americans in earthquake-prone areas don’t buy earthquake insurance, largely due to expensive premiums, high deductibles and a reluctance to pay for an unpredictable event. The United States doesn’t require anyone to have it, as it does for flood insurance in some high-risk regions. No state has successfully expanded quake coverage beyond a small fraction of the population.

In California, about 10 percent of homeowners carry quake coverage, according to data that insurers are required to submit to the state. In Oregon, about 19 percent of homeowners are covered for earthquakes, according to a 2014 survey by the state insurance regulator.

The number is a mystery in Washington, which has the second-highest seismic risk of any state in the country, after California. Kreidler’s office has previously stated that up to 15 percent of the state’s homeowners have earthquake insurance, an estimate that it said comes from the Northwest Insurance Council, a trade association.

But Kenton Brine, the council’s president, said its numbers come from a national survey and that his association has no data for Washington.

“The short answer is I don’t have a number,” he said of Washington.

When The Times informed Kreidler that the state’s estimate can’t be supported, he said he would, for the first time, consider asking the insurance companies to provide his office with their coverage statistics.

‘You just have to have it’

Earthquake insurance paid off for Karen Pohio, a Seattle resident who owns a home in Christchurch, New Zealand.

Every homeowner policy in New Zealand comes with $100,000 of earthquake coverage provided by the government, along with coverage for contents and insured land. After earthquakes ravaged Christchurch in 2010 and 2011, Pohio was able to fully restore her home there with insurance payouts from the government and a private insurer.

Pohio, community programs manager for the King County Correctional Facility, knows Seattle’s earthquake risk but she hasn’t purchased quake coverage here.

“It’s just too expensive,” she said.

Earthquake premiums collected in Washington state have increased by almost 60 percent since 2004, according to data from the National Association of Insurance Commissioners. That rise is driven by spikes in rates, property values and construction costs, according to regulators, analysts and industry representatives.

Even something as seemingly random as a ZIP code change can trigger a rise in premiums. Judy and Donald Stenberg’s earthquake premium increased almost 75 percent in 2013 after Bellevue annexed unincorporated land that includes their property, a shady lot on Cougar Mountain.

The couple complained to the insurance commissioner’s office that a new ZIP code shouldn’t warrant such a large price hike. But the regulator responded that the company, Safeco Insurance, was within its rights.

The Stenbergs, fearing the inevitable quake, kept the policy, which cost $771 this year. “You just have to have it, if you can afford it,” Judy Stenberg said.

It isn’t only the increased premiums that have led some to forego coverage. Insurers have also increased deductibles to limit their losses, and some companies won’t write policies with a deductible below 20 percent. That would mean a homeowner with $200,000 of quake coverage wouldn’t receive a payout unless the damage was greater than $40,000.

Still others have difficulty finding an insurer at all. Gaylon Ray, a retiree from Utah, wanted earthquake insurance for his dream home in Long Beach, Pacific County, located just a half a mile from the Pacific Ocean. Long Beach, a peninsula with no high ground, is among the most vulnerable places on the West Coast to an earthquake and tsunami. Although State Farm provided Ray homeowners’ insurance, it declined to cover his home for earthquakes.

An insurance broker found a company willing to insure Ray’s home — Canopius US Insurance, a subsidiary of a large Japanese insurer. Canopius is part of a loosely regulated market that offers what’s known as “surplus line” coverage. Such companies aren’t licensed by the state and can only sell policies if a broker guarantees that none are available from regulated insurers.

If unlicensed insurers can’t pay their claims, their policyholders won’t be covered by a state fund that serves as a safety net for regulated insurers. Ray reluctantly signed up with Canopius.

“I just wish it was my neighborhood agent,” Ray said. “It’s still better than nothing.”

Washington home and business owners paid at least $170.6 million for earthquake policies in the surplus market last year, according to the Surplus Line Association of Washington. That sum is more than the state’s regulated insurers collected in earthquake premiums, and it is on pace to rise this year.

Kreidler, the insurance commissioner, said surplus lines help fill the void left by the regulated carriers.

“It obviously has a much lower level of consumer protection,” Kreidler said. “But I certainly don’t want you to have the impression that somehow people who buy a surplus-lines policy are on their own.”

In some cases, though, that is exactly what happens.

Michael Brown received a notice in 2011 that his insurance provider — a syndicate of firms managed by a division of Wells Fargo — raised his premium by 25 percent due to a surcharge on properties within a mile of the Pacific Ocean. But his home is in Shoreline, 95 miles east of the Pacific.

“Please do everything in your power to rein in this outrageous abuse that is the likely result of a monopoly in this industry,” Brown wrote in a complaint to the insurance commissioner’s office.

A state insurance official responded to the Browns that their carrier is “a Surplus Lines Company falling outside the regulatory authority of this office.”

Brown declined to comment.

Costly realities

With no requirement to offer earthquake insurance and little competition in Washington state’s regulated market, premiums tend move in one direction: up.

Of nearly 30 earthquake-rate requests since 2008 reviewed by The Times, only one insurer sought lower premiums. “Our current rates are too high,” Brotherhood Mutual Insurance wrote in 2009. It had eight business clients.

In the other requests, the insurance commissioner’s staff pressed companies for details on the accuracy of their models and the math used to justify their profits, often withholding their approval until insurers responded to the questions. But this rarely changed the outcome. The commissioner’s staff approved increases in 24 cases and dismissed two after insurers declined to respond to questions.

In one case, the regulator won a small concession. Oregon Mutual Insurance in 2009 filed to raise earthquake rates for homeowners by up to 277 percent. After the insurance regulator objected, the company agreed to cap the increases at 149 percent.

The same filing made a threat that looms over every such negotiation. “If this filing is rejected, Oregon Mutual will likely need to cease offering earthquake coverage,” the company wrote. “We do not think it is in the state’s interest to force another company to withdraw from the earthquake market.” Kreidler’s office approved the rate increase.

Kreidler, in a recent interview, said he has tried to expand access to affordable earthquake insurance. He wrote letters in support of an unsuccessful, California-backed initiative to lower earthquake-insurance costs in 2012 with federal loan guarantees. He looked into whether Washington could develop a state-run insurer like the one in California, where the nonprofit California Earthquake Authority has cut its rates by 55 percent over the last 20 years and increased the number of policies by 22 percent since 2006.

Kreidler said a system like the one in California could make earthquake insurance more available and affordable in Washington, but creating such an authority would require state legislation or hundreds of millions of dollars in taxpayer funds. Kreidler, a former state and federal lawmaker, said it’s not feasible given the state’s existing funding challenges.

“The chances of me being successful and not making an ass out of myself are zero to none,” he said. After 15 years of trying, Kreidler said he is out of ideas. “I don’t know of anything else.”