EARTHQUAKE / THE LONG ROAD BACK : Some Insurance Firms Straddling Fault Line : Liability: Unprecedented series of disasters has led some experts to predict that certain small companies may fail.

Some insurance experts think the Northridge earthquake could sink a few smaller insurance companies, especially ones heavily focused on commercial coverage in California.

The quake has also revived questions about the industry’s overall soundness, given the unprecedented string of catastrophes stretching back to the 1989 Loma Prieta earthquake.

A.M. Best Co., one of the leading insurance rating firms, based in Oldwick, N.J., has begun an “informal review” of about 20 carriers whose business is concentrated in California, John H. Snyder, vice president for property-casualty insurance, said Monday. He declined to name the companies.

“Do I expect 20 companies to become insolvent?” Snyder said. “No, but there might be a few, especially companies that are quite small and commercially oriented.”

Weiss Research, a consumer-oriented rating firm based in West Palm Beach, Fla., issued a dire report--coincidentally released the day after the earthquake--saying that “major property and casualty insurers may not have enough capital to pay the claims that could result from . . . an unexpectedly large natural disaster.”

Weiss did not mean to imply that the Northridge quake was the sort of disaster that could precipitate that kind of an industry crisis, Weiss analyst Ted Brownstein said.

Insurance payouts from the Northridge quake are not expected to come close to the $18 billion in insured losses from Hurricane Andrew, because much of the damage was done to uninsured public property such as freeway overpasses and because earthquake policies carry high deductibles--usually 10% of coverage limits.

The trade publication Business Insurance on Monday quoted catastrophe underwriters at Lloyd’s of London as estimating the insured losses from the quake to be up to $2.5 billion.

Insurers have yet to estimate their individual dollar losses from the quake, saying it is too early to be accurate. State Farm, California’s largest writer of homeowners and earthquake coverage, said it had received 50,000 loss reports as of Monday and expected the total to reach 115,000 claims. That compares with 31,000 claims for State Farm in the Loma Prieta quake.

Brownstein said Weiss’ concerns stem from insurers’ tendency to “fight the last war”--acting as though the worst disaster losses in the past indicate likely losses in the future, and setting their reserves accordingly. But he says that disaster losses may be spiraling upward and that an $18-billion loss like that of Hurricane Andrew may be exceeded by another disaster.

Weiss gave weak safety ratings of “D+” to Aetna Casualty & Surety Co. and “D” to Reliance Insurance Co., large national carriers that write extensive earthquake insurance in California.

The Weiss firm tends to be conservative. Aetna’s rating from A.M. Best is “A” (excellent).

Best’s Snyder said he doubts that the Northridge earthquake will result in premium increases soon.

Insurance Commissioner John Garamendi has softened his stance against rate increases, however. On Jan. 12, he quietly approved a 6% increase in homeowners rates for Allstate Insurance Co., California’s second-largest carrier.

The rate hike, which will average $24 a year per policyholder, was approved without a hearing. It was the first hike in homeowners’ rates for any large carrier since Garamendi took office in 1991.

William Ahern, deputy commissioner, said one factor in granting the increase was that Allstate has paid rebates to policyholders under the Proposition 103 insurance rollback initiative.

* SBA TO THE RESCUE: Jane Applegate has tips from the Master of Disaster. D3