State needs to back plan to shake up earthquake insurance rates

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Cutting premiums would benefit all sides

The Desert Sun (Palm Springs, California)

The California Earthquake Authority approved a plan to cut earthquake insurance rates by an average of 22 percent last week. Now the final decision rests with the state Department of Insurance. The department should cut rates – but in a way that is more equitable for all state residents.

There’s really no need to keep earthquake insurance rates so expensive, especially in the Coachella Valley where they are slated to go up more than 40 percent. While a hike is not a pleasant prospect for valley residents, it’s only fair that those who live in areas of high earthquake risks should pay more. Smokers, because of the choice they make, pay more for life insurance, after all.

At the same time, since among a government program’s aims should be creating more equal situations, the Department of Insurance needs to consider dropping rates to a lower degree than what the California Earthquake Authority recommended. This still would mean an increase in valley rates, but it wouldn’t be so steep.

Credit due for effort

The state deserves credit at least for re-examining earthquake insurance costs. After all, the cost of reinsurance – insurance that insurance companies buy to help cover their claims – has fallen by about $150 million each year since the California Earthquake Authority began in 1996. That makes earthquake insurance a fantastic deal for insurers at consumers’ expense. In addition, earthquake-hazard probabilities and the risk to property damage are much lower than thought a few years ago. That conclusion is drawn from a number of scientific discoveries and advances made during the past decade; two quakes that rumbled through the area in June, including a magnitude-5.2 centered near Anza, bear this out locally. By state statute, earthquake insurance rates must be based on the best available science.

Still, the state should not lower rates as much in the rest of California so that rates in the valley or a few other counties would not have to jump as high. Rates for the Coachella Valley and a few other areas in would rise too much while the most of state would see them decline too much. Rates would rise in the valley because research indicates we are at a greater risk for a large, damaging quake than other areas of California. Because of that, a $300,000 home on average would cost $867 annually to fully insure under the CEA‘s proposal. That’s $252 more than current rates.

A more equitable lowering of the rates across California still would offer a nice windfall to most of the state’s 730,000 policyholders. That means more dollars for homeowners to pay off debts or to spend on Main Street, offering a slight boost to local economies.

Affordability is critical to all

More importantly, in the long run lower rates mean more California homeowners can afford to be covered by earthquake insurance. Only about 15 percent of homeowners buy the insurance, mainly because of its high cost and deductibles, according to the state treasurer’s office. Indeed, since 1998 about 200,000 Californians have dropped earthquake coverage. If a major earthquake should strike at current levels of insurance participation, officials predict taxpayers will have to fund a far larger assistance package to affected areas.

Reducing rates to bring more people into the program also is vital for its long-term solvency and to help keep costs low. As with other insurances, the more people who participate, the larger the pool of dollars that will be available to draw upon. In part for that reason, the state consumer group Foundation for Taxpayer and Consumer Rights endorsed the reduction last week. In the long run, more homeowners in the pool could mean rate reductions for valley residents. More homeowners mean more potential claims so the state has to balance the actuarials.

If the Department of Insurance approves a reduction, California homeowners should see lower rates by next summer. It would mark the first rate cut in six years – and that would be something to start shaking all over.

The California Department of Insurance may lower earthquake insurance rates by an average of 22 percent per homeowner but increase it in the Coachella Valley by 40.9 percent.

The state should not lower rates as much so that rates would not jump as high in some parts of California, including the valley.

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