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INSURANCE

Plan would raise quake premiums

Consumers could pay 8% more and issuers one-third less under a compromise headed to the state Legislature.

August 28, 2007|Marc Lifsher | Times Staff Writer

sacramento -- Consumers could pay an average of 8% more a year for state earthquake insurance under a plan to restructure the finances of the California Earthquake Authority, while insurer contributions to the state agency would be cut by a third.

Under a proposal approved by the authority's board of directors on a 2-1 vote, insurance companies would get a $1-billion reduction in the amount of money they must make available to pay claims in the event of a major earthquake.

Supporting the potential rate hike for consumers and the cut in assessments for insurance companies were board members Gov. Arnold Schwarzenegger and Insurance Commissioner Steve Poizner, both Republicans. Opposing was Democratic state Treasurer Bill Lockyer.

Backers of the financing plan say it would avert a potential insurance crisis, bolster a shaky housing market and keep California's economy strong. But Lockyer called it "a bad deal" for homeowners and consumers.

About 755,000 Californians have earthquake policies issued by the state. They pay average annual premiums of about $700.

The compromise, which is being promoted by state Sen. Michael Machado (D-Linden), now goes to the Legislature. To become law early next year, the measure needs to win approval before the Legislature recesses Sept. 14.

The bill, SB 430, comes more than a decade after the earthquake authority was established. At the time, the law provided that for the first 12 years insurers would be obligated to provide $2.2 billion to help cover claims from a moderate earthquake.

But that provision expires Dec. 1, 2008, and the state is figuring out what to do. The earthquake authority says it is essential to have the money available, but the insurance industry says its obligation ceases next year.

The compromise hammered out would maintain the companies' obligation, but at a lower dollar amount. And the difference would be made up partly by higher premiums to be paid by consumers.

Insurers insist they are not abandoning the earthquake authority. They point out that the plan calls for them to continue providing $1.2 billion in claims-paying power -- plus an unrelated $1.5 billion in continuing industry obligations to the authority.

"This makes the CEA stronger," said Sam Sorich, president of the Assn. of California Insurance Cos. "We're taking on a new responsibility."

The agreement before the Legislature, Machado said, is a politically workable compromise, given the clout of the deep-pocketed insurance industry in the Legislature and the Schwarzenegger administration. "This is the only shot we have," Machado said.

Lockyer contends that the proposal, the result of months of negotiations between 17 insurance companies and earthquake authority staff, would drive up the average price of an already expensive policy by $55 annually, making the state's earthquake insurance policies less attractive to consumers.

At the same time, he said, it would lessen the fund's ability to handle a catastrophic event like the rocker that leveled San Francisco in 1906. "The only winners here are the private insurance companies," he said.

Lockyer is lobbying legislators to oppose the Machado bill and support an alternative plan that would freeze insurance industry contributions at current levels. Insurers, politicians and the Schwarzenegger administration say that the treasurer's proposal has no chance of passing. But consumer activists are urging lawmakers not to let insurance companies off the hook.

At stake is the future of the publicly operated earthquake authority.

The Legislature established the agency in 1996 after the insurance industry balked at being forced by law to offer earthquake coverage along with traditional homeowner policies.

Many insurers, which paid out more than $15 billion in claims after the 1994 Northridge earthquake, said they would stop doing business in California rather than suffer even greater losses the next time a major temblor hit.

Even fans of the earthquake authority acknowledge that its success has been modest at best. Estimates that the fund would reach $6 billion in reserves and 2 million customers by the end of 2008 were well off the mark.

Lowering the insurance industry's stake in the agency is likely to make the fund weaker and less attractive to homeowners, who are turned off by its steep premiums and deductibles, consumer advocates say.

"They are losing a whole billion [dollars] in claims capacity," said Amy Bach, executive director of United Policyholders, a San Francisco-based group. "The less skin the private companies have in the game, the less confidence that the public and agents are going to have in the entity."

A financially weakened earthquake authority could put the Legislature, governor and taxpayers on the hot seat if the agency doesn't have enough money to cover all claims, Bach and Lockyer warn.

The governor's office, however, prefers to put a bright face on the agency's potential $1-billion loss in claims-paying power.

Maintaining some insurance industry participation is better than having none at all, said Sabrina Lockhart, a Schwarzenegger spokeswoman. "We want to be in the position where we will be able to continue this important safety net for consumers," she said.

Insurance Commissioner Poizner said he would have liked to keep insurance support at its current level. But he wasn't willing to play "a game of chicken with CEA policyholders."

Poizner, the industry's top regulator, cautioned that he wouldn't necessarily approve any proposed premium increases. Nevertheless, he called the compromise a short-term positive step.

"Is it going to solve all of CEA's problems? No," Poizner said. "But is it better than absolutely nothing? Yes."

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marc.lifsher@latimes.com

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