Contra Costa Times (California)
The cost of earthquake insurance could fall by an average of 22 percent for homeowners if a state board today approves a recommended rate cut.
If the board of the CEA, or California Earthquake Authority, supports the cut at its meeting in Sacramento, the proposal would go the state Insurance Department for approval, and ratepayers could see decreases next year.
Consumer groups said a decrease would lead more homeowners to buy the insurance, which would help taxpayers as well as those individuals. Earthquakes pose a constant and potentially devastating threat to California homes, yet only about 15 percent of homeowners have earthquake insurance because of its prohibitively high cost.
“If people aren’t buying earthquake insurance, somebody’s going to have to clean up the mess, and it’s going to be funded by taxpayers,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a nonprofit consumer advocacy group in Santa Monica.
But for the insurance industry, making sure the CEA could pay all its claims after a major quake is a key concern.
“We want to make sure that any rate change does not affect or jeopardize the financial soundness of the CEA,” said Jerry Davies, spokesman for the Personal Insurance Federation of California, an insurance company trade group. He said his group is waiting to hear from an expert before taking a position on the proposal.
The CEA said it currently could pay up to $7 billion in claims. It has about $2 billion in cash, and the rest would come from reinsurance and additional payments from the participating insurers.
The proposed overall rate decrease of 22 percent, which would be the first change in CEA rates since 1999, would not affect all policyholders equally. Most would see their rates go down, but some could be unaffected or even pay more.
A main reason for the proposed rate decreases is that the cost of reinsurance — insurance that insurance companies buy to help cover their claims — has dropped from about $250 million per year to less than $100 million per year since the CEA started.
The proposed rating plan, which is the product of several years of research by CEA staff members, would make greater distinctions based on when the house was built and how many stories it has. The proposal does not affect coverage for mobile homes or the loss assessment portion of condominium policies.
The CEA was created in 1996, after losses from the 1994 Northridge quake caused homeowners insurance companies to threaten to pull out of California because insurers are required to offer an earthquake policy with every homeowners policy. Many large insurers now participate in the CEA, which is the state’s largest provider, instead of offering their own policies.
But the high cost of earthquake insurance, coupled with high deductibles, have discouraged most California homeowners from buying it. Currently, the CEA charges an average of $2.79 per $1,000 of coverage per year. Consumers typically buy the same amount of coverage for earthquakes as they do for fire.
The three voting members of the CEA‘s board are Gov. Arnold Schwarzenegger,
Treasurer Phil Angelides and Insurance Commissioner John Garamendi. Whether the rate cut will be approved remains unclear.
Angelides said he is in favor of it. He estimated that it would save the average rate payer $259 per year.
“Too often, the Earthquake Authority has been a better deal for insurers than it has been for consumers,” he said.
A spokesman for Garamendi said he had not made up his mind about the decrease. The governor’s spokeswoman said she could not speculate on how the governor’s representative would vote.
