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Insurers well-braced for next big California earthquake

When the next big earthquake strikes California, it’s unlikely to hurt the insurance industry as much as the last one did.

The nation’s largest property insurers curtailed their exposure to California quakes a decade ago when they persuaded state lawmakers to shift most of the risk to a state-run agency, the California Earthquake Authority.

The privately funded CEA began selling policies in 1996 – two years after a 6.7-magnitude quake in Northridge caused insurers to conclude they could not afford to provide earthquake coverage in California.

Today, 86 percent of the state’s homeowners have no earthquake insurance. CEA officials hope this month’s 100th anniversary of the 1906 earthquake that destroyed San Francisco, along with the lessons of Hurricane Katrina, will prompt more to sign up.

“The story of earthquake insurance in California is one of cut and run,” said Doug Heller, executive director of the Foundation for Taxpayer & Consumer Rights, a frequent industry critic.

Insurers emerged from the Northridge quake with a $12.5 billion bill, raising fears they would be wiped out completely if an even bigger temblor were to hit one of the state’s major metropolitan areas. The Northridge quake nearly bankrupted 20th Century Insurance, now known as 21st Century Insurance.

To help launch the CEA, California insurers chipped in $750 million in initial funding and agreed to pay up to $3.6 billion to help the agency cover claims in a catastrophic quake.

The industry’s exposure to a California quake will shrink by about $2.2 billion in 2008, when most financial commitments to the CEA are scheduled to expire.

The CEA provided a practical solution to an intolerable situation, said Jerry Davies, spokesman for the Personal Insurance Federation of California, whose members include State Farm Insurance and Farmers Insurance.

“When you don’t understand insurance, it’s easy to be critical,” Davies said.

By backing the CEA, insurers would be able to continue selling basic homeowners coverage.

California law requires a separate earthquake policy to be offered along with homeowners. Insurers say this requirement led homeowners living near faults to accept the quake coverage while property owners in less risky neighborhoods declined.

After Northridge, carriers representing about 93 percent of the California homeowners’ market stopped writing new policies or imposed restrictions to avoid offering earthquake coverage.

Those constraints prompted lawmakers to create CEA, which relies on policyholder premiums, industry backing and reinsurance to cover possible claims.

The agency estimates it could cover up to $7.5 billion in claims. If the total of insured damage exceeds that amount, CEA is allowed to trim payments due to its policyholders.

There are a few insurers that offer earthquake coverage outside CEA. The largest of those are Geovera Insurance and Pacific Select Property Insurance. Neither sells homeowners insurance, giving them the flexibility to be more selective about where they provide earthquake coverage.

Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Topics California Catastrophe Carriers Homeowners Earthquake