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INSURANCE

Plan would raise earthquake insurance premiums

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

By Marc Lifsher,
Los Angeles Times Staff Writer
10:10 PM PDT, August 27, 2007

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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