A member of the California Earthquake Authority‘s ruling board demanded Thursday that the agency be overhauled, contending the complex financial structure that sustains the CEA could fail in the event of a catastrophe.
State Treasurer Philip Angelides, one of three state officials who decide broad policy for the CEA, urged the Legislature to scrutinize the nation’s first state-run, privately financed earthquake insurer and come up with changes in the multibillion-dollar system.
Angelides, who has been critical of the CEA‘s operations in the past, told key lawmakers that “the Legislature, when it returns in January, should make review and reform of the CEA a key priority.”
A fundamental problem, Angelides said, is the CEA‘s “layer-cake” financing, which is composed of a mix of funds from reserves, insurers’ assessments, Wall Street investors and reinsurance.
But Angelides said the $7.5 billion pool – particularly the critical reinsurance piece – could unravel in the event of a catastrophe, such as a major quake and multiple aftershocks, that exhaust the pool and leave policyholders unprotected.
Angelides also said the CEA needs to be more competitive in attracting policyholders, particularly low-risk customers. The fear of Angelides – and some executives in the insurance industry – is that private companies will siphon off the best customers, while the CEA will be left with the high-risk policyholders.
The CEA, which covers about 850,000 policyholders, should “be financially sound and capable of carrying out its responsibilities over the long term,” the treasurer added in a detailed letter to the heads of the Senate and Assembly insurance committee, the top executive at the CEA and to Insurance Commissioner Harry Low.
But the CEA said the agency is well-financed, pointing a recent independent audit sought by the board.
“We would conclude that the CEA‘s current capacity to pay claims is as good as or better than that of private catastrophe insurers,” said CEA spokesman Mark Leonard, citing the auditors’ conclusion.
Leonard also said the CEA policies, called “mini-policies,” would be able to protect policyholders in the event of a devastating quake like the 1994 Northridge earthquake.
“The mini-policy was to designed to provide catastrophic coverage, to rebuild people’s homes, and it was designed to reduce the exposure to the industry,” he said.
“It was a choice between the mini-policy and no coverage for the earthquake, and it never would have passed (the Legislature) without the sponsorship and support of responsible consumer groups,” Leonard said.
But one major consumer group, the Santa Monica-based Foundation for Taxpayer and Consumer Rights, says the 15 percent deductibles in the CEA policies – $30,000 in the case of a $200,000 home – means people often must foot the bill for the damages, because the average home damage is less than the deductible.
“Unless you have extraordinary, catastrophic damage, the policy is worthless. That has to be the long-term concern here,” said Foundation spokesman Doug Heller.
The CEA, the first agency of its kind in the nation, was created in 1996 in response to the turmoil in California’s homeowners’ insurance market following the devastating 1994 Northridge earthquake.
The Authority is a pool of funds provided by insurers and investors to cover quake losses.
The idea of the CEA was prompted mainly by large insurers, who under California law are required to offer quake insurance to people who buy their homeowners’ coverage.
That law crippled many carriers, who faced huge losses because of their Northridge earthquake claims.
The CEA was set up to market quake policies and cover the claims. Companies representing about two-thirds of California’s quake insurance market participate in the CEA.
The mini-policies average about $2.79 per $1,000 of insured value statewide, or roughly $560 annually for a $200,000 home. The policies can cost as little as 80 cents per $1,000 in low-risk areas, and up to $8.70 per $1,000 in the most quake-prone zones for unreinforced masonry homes.
More than nine out of every 10 homes insured by the CEA are wood-frame houses, costing up to $5.70 per $1,000 – or $1,140 for a $200,000 home.
The CEA‘s mini-policy covers the dwelling, but not related structures, such as fences, garages, landscaping, sheds, pools and walkways, among other items.