San Jose Mercury News (California)

The California Earthquake Authority‘s board Thursday approved an average 22 percent rate cut for earthquake insurance in a proposal that now goes to the state Department of Insurance for final clearance.

The vote was 2-0, with representatives of both Gov. Arnold Schwarzenegger and state Treasurer Phil Angelides supporting the cut. A representative of Insurance Commissioner John Garamendi, the third voting member of the board, abstained from the vote, saying Garamendi wanted to maintain neutrality since he is also the regulator who has final say on the cut.

Garamendi’s Department of Insurance will now analyze the proposal. If approved, it could go into effect by the middle of next year.

The CEA estimates that under the proposed cut 85 percent of its policy holders would see their rates fall, some by hundreds of dollars per year.

“I expect to hear more phone calls from people who in the past have summarily rejected it based on price” if the cut is approved, said Mike Keirstead, a State Farm Agent in San Jose.

Getting more homeowners to buy earthquake insurance is one of the goals of those behind the rate cut. Currently, only about 15 percent of California homeowners are insured for a quake.

“We do want to increase as much as we can the number of homeowners who have earthquake insurance,” said Clark Kelso, the governor’s designee and chair of the CEA board.

Angelides said after the vote that the cut would encourage more people to insure their homes.

“That’s good for California families and it’s good for the economy,” he said.

The staff of the CEA recommended the decrease after years of study, and consumer advocates hailed the vote.

“This was a key moment for California homeowners, because getting the approval of the earthquake authority was so important to lowering rates,” said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a non-profit consumer advocacy group in Santa Monica.

But insurance industry experts were not convinced that the lower rates would allow the CEA to remain solvent in the event of a major quake. Dan Dunmoyer, president of the Personal Insurance Federation of California, an insurance company trade group, said rates should fall but 22 percent is too large a cut.

But Dunmoyer acknowledged that three ambitious politicians might find it difficult to pour cold water on such a popular proposal. “Even if we’re right on policy, the politics of this make it difficult,” he said.

A dramatic drop in the cost of reinsurance — which insurance companies buy to help them pay claims — is a principal reason for the rate decrease. In addition, scientists now can better assess how factors such as age and design affect the risk to a home in an earthquake. And years without a major quake have allowed the CEA to build up funds for paying claims.

The CEA was created in 1996, after losses from the 1994 Northridge quake made homeowners insurance companies, which are required to offer earthquake insurance with every homeowner’s policy, threaten to leave California altogether. Many large insurers now participate in the CEA instead of offering their own policies.

For consumers, the high cost of earthquake insurance and the high deductible are huge barriers. The CEA, which is the largest provider of earthquake insurance in California, charges an average of $ 2.79 per $ 1,000 of coverage.

Homeowners typically buy as much quake coverage as they have fire insurance. Many policyholders pay between $ 500 and $ 1,000 per year for coverage, though prices can be higher for expensive homes in the earthquake-prone Bay Area.

CEA policies have a 15 percent deductible, which can be reduced to 10 percent for an extra fee. This means a homeowner could face tens of thousands of dollars of payments for damage before the insurance would kick in.

The high cost and high deductible have led the vast majority of California homeowners to decide against the coverage.

“Every year I think this over,” said Maryellen Boyle, who has owned her 2-bedroom house in Santa Cruz for seven years and who does not have earthquake insurance. Boyle said she’s not convinced of the value of insurance because the land her house sits on is much more valuable than the house itself.

“I wonder, well, how much does this actually cover?” she said.