Stabilize State’s Insurance Market : Price controls and mandatory earthquake coverage combine to squeeze firms out of the homeowners market.

Legislators and journalists are finally beginning to recognize what many homeowners and home buyers already know: California is in the midst of a home insurance crisis.

Faced with the prospect of ruinous earthquake liability, a growing number of insurers have stopped writing new home insurance policies in California. Several are even considering withdrawing entirely from the state’s homeowners insurance market.

This trend is wreaking havoc on new and potential homeowners who find it increasingly difficult to obtain affordable home insurance. Left unchecked, the worsening home insurance scarcity could derail California’s building industry and seriously threaten the stability of our current economic recovery.

What insurance industry critics aren’t telling us is that the current crisis has been created by misguided state laws that require home insurers to offer earthquake coverage and then prevent these same insurers from charging fair market rates for their earthquake policies.

Worse, the law specifies that insurers who refuse to offer earthquake coverage--even for financial solvency purposes--cannot continue to sell new homeowners insurance policies in California.

The combination of government-imposed price controls and mandatory earthquake offerings to all policyholders forces insurers to make a very difficult business decision: risk huge losses by continuing to sell underfunded earthquake insurance policies or opt out of the homeowners insurance market. For obvious financial reasons, a growing number of insurers are choosing the latter course.

A brief look at recent history will demonstrate the folly of California’s current approach.

Over the last 25 years, California insurers have collected approximately $3.8 billion in earthquake premiums. By comparison, last year’s Northridge earthquake caused more than $10 billion in damages. A single earthquake devoured nearly three times the total amount of premiums collected over a quarter of a century. If another large quake were to hit our state, many insurers simply would not have the funds needed to pay all of the claims.

It’s time for policy-makers in Sacramento to realize that current state laws are simply doing more harm than good. We must take steps now to begin changing these laws.

The initial step in this process is to eliminate the immediate threat to the homeowners insurance market, namely the legal requirement to offer earthquake coverage. I have introduced legislation, Senate Bill 58, which will “de-link” earthquake coverage from homeowners insurance.

Under SB 58, insurers would no longer be required to offer earthquake insurance as part of their homeowners policies. In addition, insurers who choose not to offer earthquake coverage would no longer be banned from writing new homeowners insurance policies.

Eliminating the link between earthquake coverage and homeowners insurance would have several immediate benefits.

First, it would stem the exodus of insurers from California by permitting companies to remain in the home insurance market without the threat of massive, unfunded earthquake liability.

By stabilizing the insurance market, SB 58 would also ensure that new home buyers have access to affordable home insurance coverage--a prerequisite for all home loans. It would truly be a tragedy if any Californian were denied the opportunity to own a home simply because they weren’t able to obtain insurance.

Finally, my “de-linkage” proposal has been carefully crafted to protect current earthquake policyholders by specifically limiting an insurer’s ability to cancel or refuse to renew any existing policy.

“De-linkage” is only part of the solution to our current insurance crisis; it addresses the issue of homeowners insurance but not the availability of new earthquake insurance.

To resolve this second issue, Congress is considering the reform of the federal tax code to permit insurers to pool funds in a tax-exempt Nationwide Natural Disaster Fund.

Until the federal government takes action, however, “de-linkage” is the only realistic and workable approach to resolve our state’s immediate scarcity of homeowners insurance. It’s a matter of economic survival both for California insurers and for homeowners.