California homeowners who buy earthquake insurance through the state-run California Earthquake Authority (CEA) could see their premiums rise under a bill that passed an Assembly committee over opposition from the state treasurer and consumer advocates.
When the California Earthquake Authority was established in 1996 two years after the Northridge earthquake, participating insurance companies were required to provide $2.2 billion to help underwrite it. They were to keep that money in reserve through Dec. 1, 2008.
That arrangement is about to expire and insurance companies want out of it. Sen. Mike Machado, D-Linden, wants to replace it with a new one in which insurance companies would be required to keep $1.2 billion available to the authority for up to 12 years. The result could be higher rates for the more than 760,000 homeowners who have quake coverage through the authority, California’s largest provider of earthquake insurance.
The legislation was approved by the Assembly Appropriations Committee, even as some committee members expressed reservations about the change and indicated they might oppose it when the bill comes up for a vote in the full Assembly.
“The chief policy objective should not be, ‘What legislation does the industry support?'” Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group, told the committee. “The only question (should be), ‘What makes the CEA more stable and CEA policies more affordable?’ This proposal goes in the opposite direction.”
State Treasurer Bill Lockyer predicted the deal would force the California Earthquake Authority to raise its rates, which now average about $700 a year, by another 8.5 percent.
He urged lawmakers to extend the industry’s $2.2 billion obligation until the authority has $6 billion in cash reserves. Currently it has only $2.7 billion, he said. Absent that, he said he wanted Machado to amend the bill to take him off the authority board.
“I don’t want to be associated with an undercapitalized fig leaf,” Lockyer said. “I just don’t think it’s conscionable.”
Machado said he had no choice but to work out a compromise with insurers because the $2.2 billion commitment expires in just more than a year.
He conceded the bill was a “Band-Aid for chaos” that would not solve all the authority’s problems. But he said waiting until next year to consider what to do about the authority’s funding, as Lockyer suggested, would only make the decision tougher.
“We will be back here at the same time with the same discussion and trying to see whether or not we can extend the sunset,” he said. “There probably is going to be greater political difficulty in trying to extend the sunset then. … There would be more incentive on the part of insurers to say, “Why should I play when the sunset is going to come in?'”
The likelihood of a rate increase would depend on how much the authority has to pay for the insurance it buys — called reinsurance– to help cover its claims, said Tim Richison, the authority’s chief financial officer and acting CEO.
“If economic conditions are favorable, we may be able to purchase an increased amount of reinsurance for the same amount we’re spending today,” he said in an interview. “There’s no guarantee that just because we have to buy more reinsurance we have to spend more money.”
He said that in addition to the $1.2 billion commitment required by the Machado bill, insurers also have a second, $1.4 billion underwriting obligation under an original provision of the earthquake authority.
The authority was created by legislation in 1996 after many insurers threatened to stop doing business in California rather than being forced by law to offer earthquake coverage, along with traditional homeowners insurance. It is run by a board made up of the governor, insurance commissioner, state treasurer and two nonvoting representatives of the Legislature.
Insurance companies that agreed to join the authority and sell its policies had to pay startup costs, plus the underwriting obligations. The $1.4 billion commitment is supposed to be phased out as the authority’s cash reserves exceed $6 billion.
The authority has about 72 percent of the homeowner earthquake insurance market in California.
Only about 13 percent of homeowners have earthquake coverage, either through the authority or a private insurer. Those going without coverage apparently prefer to run the risk of major losses rather than pay rates that can run several thousand dollars a year, depending on the location, size, value, age and construction of the house.
Lockyer said homeowners without coverage apparently expect the state and federal governments to bail them out when California is hit by another major quake.
He suggested that the Legislature should give insurers the choice of adequately funding the authority or abolishing it and leaving coverage up to private insurers.
“It doesn’t make sense for us to have a little tiny market niche so the insurance industry doesn’t even have to work at providing a private market,” he said.
Machado said most insurers don’t want to provide earthquake coverage themselves.
Topics California Catastrophe Natural Disasters Carriers Legislation Homeowners Earthquake
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