Purchases of Earthquake Coverage Lag

In the first three months since a new state agency began offering earthquake insurance, the number of homeowners buying coverage has slipped about 7% below original projections, the head of the agency said Thursday.

But while the early figures indicate that some attrition has begun in the proportion of homeowners with coverage, it is too early to reach a definitive conclusion, said Greg Butler, head of the California Earthquake Authority. About 30% of homeowners statewide had coverage after the Northridge quake.

At a meeting of the quake authority board in Sacramento, officials also heard that EQE, International, the private San Francisco firm that gave the state key risk information upon which the agency set its quake insurance rates, has abandoned its practice of referring homeowners in low-risk areas to an out-of-state company that would charge lower prices.

The chief executive officer of EQE, Douglas Frazier, said his company has terminated its referral relationship with the out-of-state company, US F & G Security. State Insurance Commissioner Chuck Quackenbush earlier this month had suggested that EQE’s relationship with the out-of-state insurer might be improper or illegal and had ordered an investigation.

Experts on quake insurance have expected the proportion of homeowners with coverage to decline. In part this is because as more time passes without another damaging quake, desire to buy such coverage naturally tails off, said Don Dunmoyer of the Personal Insurance Federation, a leading insurance lobbyist.

Officials suggested Thursday that it may be difficult to determine how much attrition is due to that reduction in desire for coverage and how much is a result of the perceptions that the state price is too high and coverage too small.

As for EQE, Quackenbush said in a statement Feb. 7 that if private carriers were allowed to siphon off customers in low-risk areas, the state would be left with the bad risks--possibly jeopardizing the quake authority’s financial viability.

Butler and earthquake authority board Chairman Kenneth Gibson said Thursday that after meeting with state insurance officials, EQE had agreed to terminate its deal under which it would assess quake risks on a specific home-by-home basis and refer those who qualified for lower insurance prices to US F & G Security.

EQE will continue assessing risks, but it will be up to the homeowners who pay for the assessments to find a company that might be willing to sell them lower-cost insurance, they said.

Under restricted circumstances, US F & G Security still would be able to sell some quake insurance, if carriers licensed to do business in California were approached first by customers and refused to sell it, state officials said.