Senator Assails Insurers Over Quake Agency : Legislature: Rosenthal says changes sought by industry could doom proposed California Earthquake Authority. He rejects firms’ call for quick action.

The insurance industry drew a sharp legislative rebuke Monday for changes it recently sought in the proposed California Earthquake Authority, notably its desire to make participation voluntary in the privately financed, publicly managed agency.

In hard-hitting letters to Insurance Commissioner Chuck Quackenbush and to an insurance industry official who had gone unusually public with the industry’s desires, the chairman of the Senate Insurance Committee said the industry’s attitude may mean the agency will never be formed.

“I for one am not willing to reward irresponsible insurer conduct with legislation to allow them to abandon, rather than better manage, earthquake insurance risks,” said state Sen. Herschel Rosenthal (D-Los Angeles).

Rosenthal said that while the Legislature had been led to believe that the industry would be willing to strike a balance between the interests of insurers and consumers, this is now in doubt and he feels further “consumer-friendly . . . reforms” are needed before the earthquake authority is finally approved.

Besides, he added, he rejects suggestions from the industry that the Legislature should act very early in next year’s session to give final approval to establish the new agency on the industry’s terms.

“I strongly believe that the members of the Legislature must have the benefit of . . . information on alternatives [to the earthquake authority] before we move forward,” he said. Thus, he said, a “fast track” is out of the question.

Rosenthal reminded Quackenbush that when the Legislature passed and the governor signed a bill authorizing him to plan for such an agency and then return to the Legislature for its final approval, the commissioner also was instructed to present at least two alternatives.

“The first order of business of the Senate Insurance Committee, when the legislative session reconvenes next year, will be to hold a hearing to explore alternatives,” he said.

Rosenthal’s letters were an indication that the earthquake authority--which would cap insurance payments to quake victims at $10.5 billion, or $2 billion less than the projected Northridge quake payments--is not a sure thing at this point.

But, speaking for Quackenbush on Monday, Deputy Insurance Commissioner Richard Wiebe said the commissioner “still thinks we can work it out” and that the earthquake authority is the best alternative available.

Citing a statement on the state Senate floor, Wiebe said Allstate Insurance may refuse to renew 1 million homeowner policies next year unless the state moves to establish an authority that would cap industry exposure to California earthquake losses.

So, Wiebe said, the crisis created by a lack of available homeowners insurance, resulting from the state’s requirements that the industry also offer earthquake insurance, would intensify unless the Legislature follows through.

In an Oct. 23 letter to Rosenthal, signed by virtually every important insurance lobbyist and five of the largest companies, the industry suggested that the proposed system be made voluntary, as far as private-insurer participation be concerned; public participation on an advisory board be cut back, and all future linkage between homeowners and earthquake insurance be ruled out.

Peter Gorman, Western regional manager for the Alliance of American Insurers and the recipient of the other Rosenthal letter, reiterated Monday that while the industry “supports the concept of the earthquake authority,” it still wants “to see it restored back to the original draft” that was backed by the industry.

Rosenthal wrote, however, that he fears an earthquake authority might not be financially viable.

Even with an original provision--later dropped--to assess policyholders an additional $2 billion in premiums if a quake’s losses exceed $4 billion, he said, the authority faced a 1% chance a year of failing to pay all claims, according to Quackenbush’s calculations. And without the assessment, this chance might rise to 3.5% to 4% a year. “This could translate into a 35%-40% risk of failure in a decade,” Rosenthal said.