Earthquake Insurance Agency Is Born

Ushering in a new era in earthquake-prone California, Gov. Pete Wilson on Friday signed three bills creating a $10.5-billion state earthquake insurance authority.

The new agency, which is expected to start up Dec. 1, will be the state’s main provider of residential earthquake insurance.

But the new policies often will cost twice as much for only half as much coverage compared to insurance issued before the 1994 Northridge earthquake.

Wilson said the authority will positively affect the homeowners insurance market because insurance providers had sharply curtailed new policies.

Relieved of much of their future earthquake liability, leading insurance companies have indicated that they will resume selling some homeowners policies. But they have not said when they would resume sales or how many policies they would offer.

Experts believe that state earthquake insurance in California could generate impetus for reform in disaster insurance nationwide.

Florida has been considering more of a state role in hurricane insurance. A national group backed by the insurance industry has been pressing Congress to authorize federal backing for what mainly would be a private federal disaster insurance plan.

In his statement accompanying his signing of the bills, Wilson did not claim that the new earthquake insurance system would be particularly popular with consumers.

But, he said, it will ensure that “homeowners no longer must risk a devastating, unrecoverable loss because they couldn’t get insurance.”

State Insurance Commissioner Chuck Quackenbush, who will be in charge of the California Earthquake Authority, also was restrained.

“Creation of the CEA is further evidence that lawmakers from both parties are willing to make the tough decisions that are necessary,” Quackenbush said.

“Like many of those challenges, preparing California for the consequences of earthquakes is a problem that defies easy solutions,” he said. “But hard work, persistence and compromise produced a financially sensible solution that will enable consumers to protect . . . their homes.”

But consumer activists, who had opposed the new agency as a bailout for the insurance industry, criticized Wilson and Quackenbush as hypocrites for supporting state insurance after extolling a free market in countless campaign speeches.

Harvey Rosenfield, author of the 1988 insurance initiative approved by voters, Proposition 103, called Friday’s signing “a fascinating action by a governor who would ordinarily be the first to stand up and scream against the creation of a new state agency.”

“It shows the governor’s ideology is nonexistent when it comes to something the insurance industry wants,” he said.

Consumers Union lawyer Betsy Imholz said Wilson has been trying to privatize profitable state ventures such as workers’ compensation insurance. “And yet he’s willing to put the state into this risky venture,” she said.

The signing was the culmination of a two-year effort by the industry to cap its liability for earthquake losses.

The Northridge earthquake on Jan. 17, 1994, brought spectacular losses to the companies after 80 years of profits from selling earthquake insurance. The companies made damage payouts totaling $14.5 billion--more than three times what they had ever collected in earthquake insurance premiums.

Also in the aftermath of Northridge, private firms that provide computerized models of possible future quake losses vastly increased their estimates of how high such losses could go.

They said it was possible that losses could some day reach $100 billion-plus, a situation that could bankrupt many companies.

The companies successfully solicited 100% premium increases from Quackenbush, and last year pushed through legislative authorization of a new mini-policy that would cut coverage to less than half of what it had been.

Still, the insurance companies believed that their exposure to earthquake losses remained too high.

A spokesman for State Farm Insurance, the largest seller with about a quarter of the market, said the company’s total potential earthquake loss in just the central part of the Los Angeles Basin would remain too high, at $8 billion to $9 billion, even after the mini-policy was implemented.

A major lobbying effort ensued, as the largest sellers pressed for legislative relief in the form of the earthquake authority.

Many companies drastically curtailed or stopped the sale of new homeowners policies in protest of the state law that required them to offer quake coverage when they sold homeowners policies. Homeowners insurance became hard to get and far more expensive.

Republicans, including Quackenbush and a solid bloc in the Legislature, quickly endorsed the concept of state earthquake insurance. It won a unanimous GOP vote.

Consumer groups fought back and, with the aid of some of the Legislature’s Democrats, forced the passage of amendments that increased the financial commitments of the companies to the new authority during its formative years, when premium reserves will accumulate.