A Pill for the California Shakes : Quackenbush proposes a privately financed quake insurance authority

California Insurance Commissioner Chuck Quackenbush is proposing that the state operate a privately financed earthquake insurance authority to make sure that homeowners can get coverage. The concept of a free-standing authority has merit, but Quackenbush’s proposed framework tilts too far toward insurers and leaves too many consumer-cost questions unanswered.

That said, there’s no doubt that Californians do face major hurdles in obtaining homeowner and quake insurance and that Quackenbush does offer a novel approach that warrants a thorough examination in legislative hearings. Until Washington enacts national disaster insurance, which is unlikely this year, it’s Sacramento’s job to see that private earthquake insurance is available.

Since the Northridge earthquake, most big insurers have stopped writing new homeowner policies or curtailed them because they are required under state law to offer earthquake coverage too when they write those policies. They simply do not want earthquake liability. So far, the drop in insurance availability has not had drastic consequences because real estate sales have been so slow.

Until now, Sacramento’s proposed solutions have been limited and unsatisfactory. The Assembly and Senate have sent bills to a conference committee. One set proposes dropping the state requirement that earthquake and homeowner policies be linked. This would put insurers back in the homeowners market but would do nothing to improve the availability of earthquake coverage. The other set of bills proposes no-frills earthquake coverage of residential structures but little coverage of household contents. This would reduce earthquake risk for insurers but probably not enough for them to resume homeowner policies with gusto.

In concept, Quackenbush’s proposed legislative plan would address both problems. A new California Earthquake Authority would be capitalized with an initial $1-billion contribution from participating insurance companies. Additional resources--up to $12.5 billion in all--from insurance companies, private investors and assessments on policyholders--would be lined up to cover claims that exceeded the first $1 billion. The quake coverage would be for homes only, up to a maximum of $400,000 in structural coverage, with a 15% deductible and limits of $5,000 for contents and $2,000 for living expenses.

But should the insurers be required to offer the new earthquake coverage with their own homeowner policies? We think so, as part of encouraging consumers to buy quake coverage. Other questions: How would premiums compare to existing ones? Is the financing doable? If the authority accumulated huge sums of money, there would have to be ironclad disincentives to dissuade present or future legislatures and governors from dipping their paws into the pot to meet other budget needs. With those caveats, the Quackenbush proposal is worth watching.