Insurers warn they would be unable to handle massive California disaster

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The Daily News of Los Angeles

As the state begins its campaign to prepare Californians for earthquakes and other catastrophes, insurers cautioned Tuesday that it needs major changes before it can handle huge disasters.

If the state suffered another calamity on par with the 1906 San Francisco earthquake, Ed Liddy, chairman, chief executive officer and president of Allstate Insurance Co., warned an audience of business leaders that insurers would not be able to cover the estimated $ 400 billion in losses. Before the next disaster strikes, he said the industry needs to find ways to work with the federal and state governments to develop a plan to cope with covering what he termed “mega-cats.”

“It’s more than just the insurance industry,” he said in an interview before his speech. “What do you do if you have a tsunami or four hurricanes? We need to have a plan, because if we had another mega-cat, we’d have a real problem.”

One way out of this is to add more policy holders to the state’s current 14 percent of homes carrying earthquake coverage — something the industry clearly supports. Beyond that, Liddy wants to see the financial burden shared by governments, businesses and insurers. While he remained skeptical of increased federal regulations, he raised the idea of a nationwide insurance plan to deal with disasters of immense magnitude.

His proposal met with agreement from a surprising ally, California Insurance Commissioner John Garamendi. The commissioner and insurers often find themselves at odds, but Garamendi, speaking in a separate event Tuesday at the same hotel as Liddy, said he supports a national insurance framework.

“The potential for risk is so great, you can’t spread it far enough to get a reasonable pool right now,” Garamendi said after briefly conferring with Liddy in the lobby. “But if you took all the policies in the United States and spread it to ice damage, fire storms and all kinds of natural disasters, people could protect themselves.”

He’s currently working with regulators in Florida and Texas to craft a risk pool that would cover California’s earthquakes and the other states’ hurricanes and tornadoes. Though this injects new risks into the California market, it also adds a significant cushion to lessen financial exposure.

“We agree with both the commissioner and our fellow competitor at Allstate, which is probably a one-time occurrence,” said Bill Sirola,a spokesman for State Farm Insurance Co. “In this day, with the possibility of a mega-disaster, we should have a more comprehensive response system in place. Whether that’s structured as a federal disaster act or a state compact remains to be seen, but the idea behind it is solid.”

The idea has traction elsewhere in the industry, according to Pete Moraga, a spokesman for the Insurance Information Network of California. He wasn’t sure whether consumers in other states would be willing to pay for the added risk of earthquake coverage, but agreed national and multistate plans could help insurers cope with regional disasters.

“The challenge is finding a fair way to do it,” Moraga said. “We may be looking at it from different ways, but it’s all about assessing risk and pricing it fairly. What may be fair in California may not be in Texas or Florida, so we’ve got to find a way to balance it so it works for everyone.”

Douglas Heller, executive director of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, wasn’t so sure that bringing other states into the picture would work for anyone, however. The frequent industry critic said that the varying issues that confront each state make it too difficult to craft a national policy, suggesting instead that insurers lower premiums to encourage more people to join the risk pool.

“The insurance industry is not going to fall apart if there’s another catastrophe,” Heller said. “They may not be able to have historic profits year after year, but they’re still making money.”

Consumer Watchdog
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