Quake Insurance ‘Averaging’ Aids Bay Area

State earthquake insurance policyholders in Los Angeles and Orange counties and much of the rest of California are paying a 9% surcharge to hold down more expensive rates in high-risk areas such as the San Francisco Bay.

The move toward “averaging” of rates statewide--to cap higher prices in the Bay Area, Imperial County and parts of Ventura County--was a policy decision made by the executives of the California Earthquake Authority last fall, but not publicly announced at the time.

“We wanted to make it affordable for the broadest number of people,” said Greg Butler, chief executive of the new authority. “We’ve struggled with this.”

Even with the rate adjustment, the basic Los Angeles and Orange County rates--where the risk is believed lower--remain little more than half those in the Bay Area and 14 affected ZIP Codes in Ventura County.

But Southern California rates would have been generally less and Bay Area rates even higher if officials had not decided to avoid charging in any location--no matter how high the risk--a basic rate that exceeded $5.25 per $1,000 of coverage.

Butler acknowledged that the authority’s actions to cap rates seem contrary to the law creating the authority. A provision of the new law declared that rates “shall not be adjusted or tempered in any way” to overcome factors of risk.

But he said the rate adjustment represents a reasonable compromise in the public interest.

The rates were controversial long before they were even announced. Last summer, Northern California legislators blocked creation of the authority for a time, seeking assurances that Bay Area residents would not have to pay 60% more than the Southland. And when rates were announced in the fall, consumer groups complained about some remaining disparities.

Altogether, there are 19 different rating territories. The four capped territories are priced at $5.25 per $1,000 in coverage. The 15 others are less, ranging down to $1 per $1,000 coverage.

Insurance Commissioner Chuck Quackenbush promised Senate Democratic leader Bill Lockyer (D-Hayward) just before final passage of the law that he would act to reduce the Bay Area rate disadvantage.

Now, with public hearings on a Consumers Union challenge to the new rates set to begin soon, officials of the earthquake authority have begun a major effort to explain and defend the new system.

Butler insisted that there was no direct connection between the rate averaging and the assurances given by Quackenbush to Lockyer.

Quackenbush, asked for comment, brushed aside the question of his assurance to Lockyer, remarking only that the averaging had been approved by the authority’s advisory board.

At a recent meeting here, Butler and officials from the private firm that developed the new rating system offered a detailed summary of what factors went into the rates, speaking publicly on some issues for the first time.

Butler said that if quake risks had been the only factor in setting rates, the rates would have been exorbitant in some places. Imperial Valley policyholders would have had to pay $20 per $1,000 in coverage, while East Bay policyholders would have paid up to $11 and parts of Ventura County $8.

But, he said, he and the quake authority advisory committee decided those rates would be so high as to discourage purchases.

As a result, he said, the committee recommended and he approved capping rates in four of the 19 rating territories. Butler said he informed Quackenbush of the decision, but had not asked his permission.

“Every time we allowed some people to pay less, we had to maintain the financial soundness of the quake authority by charging others more,” he said.

The quake insurance rates are still for the most part risk-based, with those parts of the state considered the most prone to damaging quakes paying the most.

These are the Bay Area counties, plus parts of Ventura, Imperial, Riverside, Fresno, Kern, Kings, Monterey and San Luis Obispo counties.

The earthquake authority took two steps in trying to bring down rates for high-risk areas: It combined some high-risk territories with areas nearby, and it increased prices in all other territories.

In the case of the Bay Area, that meant folding three separate rating territories into one.

In order to bring down Oakland rates, for example, parts of San Francisco, where risks were considerably lower than the East Bay, were assigned the same rate as Oakland and placed in the same territory.

The adjustments in price were occasionally substantial. The change meant that an Oakland resident in a $200,000 home will be paying $1,150 less than risk alone would have required. In western sections of San Francisco, the rate on a $200,000 house went up about $250 as a result.

The overall Bay Area basic rate for a $200,000 home is now capped at $1,050.

Even these adjustments did not lower the overall rate in the Bay Area territory below $5.60 per $1,000 in coverage, Butler said. So it was decided to let the rest of the state--where the risks dictated a rate much lower than $5.25 per $1,000--pay 9% more.

In most of Los Angeles County, this means the rate went up from about $2.47 per $1,000 in coverage to $2.70, and in most of the San Fernando Valley, from about $3.57 to $3.90.

For a $200,000 home the surcharge means an annual basic increase of $46, to $540, in most of Los Angeles County, and an increase of $66, to $780, in most of the San Fernando Valley.

With only four rating territories capped, all 15 others--which account for about 75% of the state’s population--are involved in the averaging. Their rates go up relatively little, while those in capped zones may get a big savings.

Quake authority officials cautioned that the basic rate is an average, with owners of new homes paying less and older homes more.

Owners of brick masonry homes will also pay more than wood-frame homeowners in each rating territory, so, officials emphasize, rates will vary and in a relatively few cases will exceed the basic cap of $5.25 per $1,000 in coverage.

The entire rating scheme is subject to the public hearings that will begin in a few weeks.

Butler and actuary John Drennan said that in outlining the rating decisions, they were signaling the position that the quake authority will take in the hearings: that the adjustments they have made are serving the overall public interest.

Quackenbush has the authority to alter the rates once the hearings are complete, possibly a matter of several months.

The assessments of comparative risk adopted by the quake authority are also being reviewed with the state Division of Mines and Geology, which in some instances has reached different conclusions on likely future shaking intensities.

The rates have been quite controversial because in some cases, areas that have had a great many quakes in the past, such as Humboldt County on the North Coast, have had their rates set very low.

Controversy also arose when homeowners in Sylmar, in the heart of the area damaged by the 1971 Sylmar-San Fernando quake, were assigned a much lower rate than most of the rest of the San Fernando Valley, and when homeowners in Palmdale, astride the San Andreas fault, were given a relatively low rate.

Butler and Dennis E. Kuzak of EQE International, the quake modeling firm that helped design the new earthquake insurance system, told a Times reporter that much of the criticism represents a misunderstanding of their methods.

Their assessment of comparative quake risks is not based on quakes that have occurred in the past, but on a “probabilistic hazard analysis” looking toward what will happen in the future, they said.

So, they explained, Santa Barbara County is assessed as relatively low risk despite damaging quakes there in 1925, 1927 and 1978, while Ventura County is assigned a higher risk, despite having suffered fewer damaging temblors.

The reason is that Ventura County has many more potentially destructive faults, and these can be expected to rupture more frequently in the future, Kuzak said.

Soils are also vital in differentiating among risks, Butler and Kuzak added. They said the reason that Sylmar policyholders are charged a lower rate than in most of the Valley is that soils are stronger there.

“There’s much more soft alluvium in Northridge, compared to Sylmar,” Kuzak said. “This affects expected loss costs. The damage to a structure there might be three or four times what it would be in Sylmar.”

Palmdale is charged a lower rate than nearby Rosamond in the Antelope Valley, he added, because the soils in Palmdale are better.

The result is that in many cases, communities on a major fault are getting a lower rate than those some distance away.

Some quake scientists, such as Caltech’s Thomas H. Heaton, say this ignores recent studies that indicate “near source effects” of quakes are much worse than the impact on places further away.

But Kuzak said the model of risk adopted for the quake authority uses more established theories, not those that have come into vogue since the 1994 Northridge quake.