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Insurers back new deal for quake fund

Under pressure, they raise their financial support, eliminating a need to hike premiums for state homeowners.

September 06, 2007|Marc Lifsher | Times Staff Writer

SACRAMENTO — California home insurers, reacting to pressure from state Treasurer Bill Lockyer, have sweetened their proposal for financing the government-backed earthquake insurance fund.

With less than a week left in the legislative session, they're supporting a new compromise that would increase insurance companies' financial support for the California Earthquake Authority by $100 million and eliminate the need to hike homeowners' annual premiums by an average of $55.

"We have a better deal on the CEA than what we started out with," said state Sen. Michael Machado (D-Linden), who is shepherding the compromise bill, SB 430, through the Legislature.

Machado's bill is scheduled to be heard in the Assembly Insurance Committee today. Despite opposition from some consumer groups, the proposal is expected to make it to the governor's desk by the time lawmakers recess before Sept. 14.

Lockyer, who was critical of an earlier version of the bill, now has withdrawn his opposition, which is aimed at keeping the 11-year-old state-backed fund sound enough to pay policyholder earthquake damage claims through at least 2018.

Lockyer is a member of the California Earthquake Authority board of directors along with Gov. Arnold Schwarzenegger and Insurance Commissioner Steve Poizner.

"The changes, while small, improve the bill from the consumer's perspective," Lockyer spokesman Tom Dresslar said. "There's no rate hike, and the insurers have to pony up more money." Last week, Lockyer complained that a previous version of the compromise would have increased premiums by an average of 8%, or $55.

The latest version of the bill "makes it crystal clear" that policyholders won't pay higher premiums to fill a hole in the earthquake authority's finances created by a $900-million reduction in insurance industry support for the fund, Poizner said.

Provisions in a 1996 law that created the authority required insurance companies to cover as much as $3.7 billion in claims from a large earthquake.

Without the new bill, that obligation would drop to $1.5 billion in December 2008. The compromise, however, would boost support to $2.8 billion but still lower the industry's overall risk of having to pay claims.

Given the "enormous clout in the Legislature" of the insurance industry, it would not be politically possible to keep its commitments to the California Earthquake Authority at current levels, Poizner conceded. "This is all about political power and a complicated political process and being practical about what can get done," he said.

The agreement keeps insurers from drastically reducing their support for the earthquake authority, a move that could have led to rate increases even greater than 8% for the fund's 775,000 customers, Poizner said.

Poizner said the new proposal would make the authority strong enough to cover losses to policyholders from a severe earthquake estimated to occur once every 500 years, causing damages at least twice as heavy as the 1994 Northridge earthquake.

Keeping a sound earthquake authority is essential to the health of California's real estate and home insurance markets, supporters of the bill say.

Sam Sorich, president of the Assn. of California Insurance Cos., a Sacramento-based trade group, said the deal, if finalized, would allow the earthquake authority to maintain an A-minus grade from A.M. Best Co., which rates the financial strength of U.S. insurance companies.

Some consumer advocates, though, dispute contentions that the Machado bill would strengthen the earthquake authority and better protect policyholders from the next major temblor.

Instead of cutting insurers' obligations by $1 billion, the proposal "lessens their risks by about $900 million and makes it less likely for them to ever have to pay claims," said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica. "The proposal today is not geared toward stabilizing the CEA or making policies more affordable.

"The only way to do that is to maintain the current system."

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