CA Policyholders Could Face Higher Earthquake Premiums as State Program is Set to Expire

Under the California Earthquake Authority, established in 1996, two years after the Northridge earthquake, California homeowners who buy earthquake insurance from the state program could see their premiums rise under a bill that passed an Assembly committee Thursday over opposition from the state treasurer and consumer advocates.   
  
When the California Earthquake Authority was established, participating insurance companies were required to provide $2.2 billion to help underwrite it. The money was to be kept in reserve through Dec. 1, 2008.   
  
The arrangement is set to expire and carriers no longer want to participate. Sen. Mike Machado wants to replace the arrantement with a new one in which insurance companies would be required to keep $1.2 billion available to the authority for up to 12 years. The result could be higher rates for the more than 760,000 homeowners who have earthquake coverage through the authority, California's largest provider of earthquake insurance.  
  
The legislation was approved by the Assembly Appropriations Committee, even as some committee members expressed reservations about the change and indicated they might oppose it when the bill comes up for a vote in the full Assembly.  
  
"The chief policy objective should not be, 'What legislation does the industry support?"' Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group, told the committee."The only question (should be), 'What makes the CEA more stable and CEA policies more affordable?' This proposal goes in the opposite direction."  
  
State Treasurer Bill Lockyer predicted the deal would force the California Earthquake Authority to raise its rates, which now average about $700 a year, by another 8.5 percent. He urged lawmakers to extend the industry's $2.2 billion obligation until the authority has $6 billion in cash reserves. Currently it has only $2.7 billion, he said. Absent that, he said he wanted Machado to amend the bill to take him off the authority board.  
  
"I don't want to be associated with an undercapitalized fig leaf," Lockyer said. "I just don't think it's conscionable."  
  
Machado said he had no choice but to work out a compromise with insurers because the $2.2 billion commitment expires in just over a year.  
  
He conceded the bill was a "Band-Aid for chaos" that would not solve all the authority's problems. But he said waiting until next year to consider what to do about the authority's funding, as Lockyer suggested, would only make the decision tougher.  
  
"We will be back here at the same time with the same discussion and trying to see whether or not we can extend the sunset," he said. "There probably is going to be greater political difficulty in trying to extend the sunset then. ... There would be more incentive on the part of insurers to say, "Why should I play when the sunset is going to come in?"'  
  
The likelihood of a rate increase would depend on how much the authority has to pay for the insurance it buys – called reinsurance – to help cover its claims, said Tim Richison, the authority's chief financial officer and acting chief executive officer.  
  
"If economic conditions are favorable, we may be able to purchase an increased amount of reinsurance for the same amount we're spending today," he said in an interview Wednesday. "There's no guarantee that just because we have to buy more reinsurance we have to spend more money."  
  
He said that in addition to the $1.2 billion commitment required by the Machado bill, insurers also have a second, $1.4 billion underwriting obligation under an original provision of the earthquake authority.