Quake Insurance Rates May Decline

The California Earthquake Authority has altered its model for calculating Bay Area earthquake risks--a change that may lead to a reduction in residential quake insurance premiums in the Bay Area and Southern California.

Under the existing model, the rest of the state, including the Southland, has been subsidizing Bay Area ratepayers, paying a 9% surcharge to keep Bay Area rates affordable. Lowering the Bay Area rates would reduce the need for that subsidy.

The earthquake authority’s chief executive officer, Greg Butler, said Friday he cannot yet be sure that a rate reduction will be approved, because actuarial calculations have not been completed.

But, he added, the board will meet Friday and “if the board can indeed reduce rates, my guess is we would want to.”

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Meanwhile, state Senate Democratic Leader Bill Lockyer of Hayward issued a statement saying that he believed rates for Bay Area homeowners would decline about 13%.

“I’ve said all along that the CEA’s Bay Area rates were much too high and based on junk science,” Lockyer said.

“I’m happy that this serious mistake has been acknowledged, and I urge the CEA to adopt rates that are lower and fairer, especially for homeowners in the Bay Area.”

But Butler and representatives of consumer organizations participating in rates hearings that have been taking place in San Francisco said they did not know how Lockyer had come up with the 13% figure.

Assemblywoman Liz Figueroa (D-Fremont), chairwoman of the Assembly Insurance Committee, and Harvey Rosenfield, a consumer advocate, said Friday that the earthquake authority should now consider a refund to consumers who paid “excessive premiums.”

Bill Ahern, a Consumers Union representative, expressed surprise that any rate changes would be approved until the public hearing process is over and Insurance Commissioner Chuck Quackenbush decides on what rates are proper next fall.

Ahern also said that the matter appears to be on the board’s agenda only in closed session.

The current rate structure for the state-sponsored quake insurance includes 19 rating bands with charges for newer homes and wood frame construction varying from $1 to $5.25 per $1,000 of coverage.

Homeowners with older homes, poor soil conditions or brick masonry construction pay more than the standard prices.

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Under the original risk model that was prepared for the earthquake authority by a private firm, EQE International of San Francisco, homeowners in the Bay Area and parts of Ventura County would have paid more than $5.25 per $1,000 of coverage for newer homes. To keep the insurance affordable, the state capped rates at the $5.25 level.

Talks about reducing rates come at a time when quake insurance sales are lagging about 10% below last year, before the state insurance system was adopted.

Butler attributed the decline to a slow start on implementing an installment payment system as well as to the passage of time since the last major quake in the state, the Northridge quake of 1994.

As for complaints about higher prices for the new coverage, Butler said a quake authority survey shows that 37% of policyholders are actually paying less, mostly in areas deemed to be lower risk.

The disagreement about what model to use for potential earthquake damage involves the question of whether a large quake would “cascade” from one fault segment to another. The model that EQE put together included an assumption that a large Bay Area quake would cascade.

But at the hearings, the state Division of Mines and Geology, headed by state Geologist James F. Davis, objected that the approach went beyond the consensus of quake scientists in Northern California and had the effect of elevating potential quake loss estimates.

In 1995, scientists concluded that a large Southern California quake would “cascade through several fault segments,” Butler said. But a similar consensus has not been reached about the Bay Area.

Now, he said, there is an agreement between International EQE and the quake authority to drop the cascading factor in the Bay Area, which will lead to lower loss estimates.