Firm’s Quake Insurance Practices Prompt State Inquiry

A private company that helped devise the state’s new earthquake insurance rates is now promoting the sale of other earthquake policies--at cheaper rates. State officials are investigating whether the move is proper and legal.

EQE, International of San Francisco announced last week that it is offering “preferred risk” policies in conjunction with a brokerage and an out-of-state carrier. These policies would be sold to people in “low risk” areas and would be priced below the state’s policies.

Insurance Commissioner Chuck Quackenbush on Friday expressed alarm and ordered an investigation. He said he fears that EQE may be helping undermine the new state agency by trying to “cherry-pick” the best customers and leave the state with only high-risk policyholders.

Quackenbush said it is against the law for out-of-state carriers like the one involved here, US F and G Security, to offer earthquake insurance in California.

“If they are selling earthquake insurance through a surplus lines company, that is in violation of the insurance code, and I want to see a stop to it,” he said in an interview.

Because it was EQE that provided key risk information upon which the state rates were set, Quackenbush said, he is “more than a little irritated” by their turning around to undercut the state rates.

A spokesman for EQE, Reed Byrum, expressed “disappointment” in Quackenbush’s statement.

“We think we’ve done a good job for the state of California in this contract and have come up with the only feasible solution based on our scientific data,” Byrum said.

Under EQE’s plan, any quake insurance buyer could seek an evaluation of his or her property, and if it were judged to be low-risk, the out-of-state surplus lines firm of US F& G Specialty would offer a lower price than the California Earthquake Authority.

It was not stated by EQE how much the consumer savings might be.

Quackenbush’s remarks came two days after the chief executive of the earthquake authority, Greg Butler, said he had called EQE executives to remonstrate with them over their announcement.

What Quackenbush and Butler are concerned about is that if private insurers grab off all the good risks, it would leave the state insuring only the bad risks.

That could bankrupt the state plan when damaging quakes occurred or force the state to drastically raise rates in the high risk areas, putting the insurance out of reach of many homeowners.

Butler acknowledged last month that in the general interest of making quake insurance affordable in the highest-risk areas, the quake authority capped rates in those areas, and compensated for that by raising them everywhere else.

But such a policy opens the way to private insurers offering the coverage for less in the lower-risk areas that have been priced higher. Butler said recently that under a $30,000 state contract, EQE had been “the first designer of the rate structure” of the earthquake authority.

Butler added that he was not accusing EQE of a direct conflict, such as using information it had acquired while designing its new sales plan, but he added: “I’m not super happy with them either.”

Quackenbush went further.

He said he is concerned that a number of quake risk modeling companies such as EQE might be planning to “cherry-pick” risks.

Cherry-picking refers to a practice whereby private insurers are willing to insure only the best risks, while leaving the worst risks to be insured by a public agency or not insured at all.

Quackenbush said he is asking his staff to review the extent of such practices.

“They are taking advantage of the situation,” he said of EQE.

When the controversy began developing last week, an EQE executive, Tom Chan, sharply denied that EQE was doing anything improper.

He said EQE had all the information on the risks long before it went to work for the state, and had every right to market its information wherever it wanted to private companies.

However, consumers groups accused the company of a conflict of interest.