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LEGISLATION

Home insurers back new financing for state earthquake fund

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

By Marc Lifsher,
Los Angeles Times Staff Writer
September 6, 2007

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an earlier version of the bill, now has withdrawn his opposition, which is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."

[email-masked]

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