11% Cut in Earthquake Insurance Rates Urged

The chief executive officer of the California Earthquake Authority on Thursday recommended an average 11% decrease in the state’s residential earthquake insurance rates.

The CEA board is expected to approve the recommendation with only minor modifications when it meets Tuesday.

The decrease in the Los Angeles-Orange County metropolitan area would average 9%, with most of the San Fernando Valley getting an 8% decrease. San Francisco Bay Area rates would go down 13%.

But in the highest-risk areas of Ventura, San Luis Obispo and Imperial counties, rates would stay the same, and some mobile home and condominium rates in Los Angeles would rise slightly, according to a rate adjustment plan endorsed by CEA chief Greg Butler.

The 418,000 policyholders who have already paid earthquake premiums to the state plan would get rebates or credits on their next bill, under Butler’s plan.

The state-operated insurance plan is the largest provider of earthquake insurance in California. The insurance is sold through private companies on the state’s behalf.

The proposed adjustments came after State Geologist James F. Davis rejected parts of the quake risk model prepared for the CEA by the private firm of EQE International, headquartered in San Francisco.

During weeks of public hearings in San Francisco, Davis has contended that EQE overstated the earthquake risk in the Bay Area, and particularly in Napa and Sonoma counties, where the proposed rate decrease by Butler is 35%, the largest of any area.

When the state earthquake insurance system was organized last year, the CEA board capped Bay Area rates to keep the price of insurance affordable in the highest-risk zone. Rates in the rest of the state were elevated by 9% to subsidize the Bay Area.

The proposed rate reduction would eliminate the need for the cap and the subsidy. Hence, rates in most of the state, including Southern California, could drop.

The three-member CEA board--composed of representatives of Gov. Pete Wilson, Insurance Commissioner Chuck Quackenbush and state Treasurer Matt Fong--discussed the matter behind closed doors two weeks ago. The board is expected to act after its public meeting Tuesday.

Butler said the rate changes would take 90 days to implement.

He said he had decided to recommend the rate decreases before the public hearings had concluded, because this was “the fairest thing to do. We should not let CEA be halted from doing the right thing by ongoing hearings.”

The average rate decrease per homeowner would amount to $62.

The average statewide earthquake premium for single-family homes would drop under the plan from $3.29 per $1,000 coverage to $2.93 per $1,000.

But this tells little about individual cases, because the state has 19 different rating territories, and even within these territories there are varying rates, depending on the age of a home and the type of construction.

In most of Los Angeles and Orange counties, the new rate, under the Butler recommendation, would be $2.50 per $1,000 for homes built in 1979 or later, $3.00 per $1,000 for homes built from 1960 to 1978, $3.20 for homes built before 1960, $4.40 for homes of other than wood frame construction and $7.95 for mobile homes.

In most of the San Fernando Valley, a higher quake risk zone, the rates would be $3.60 per $1,000 for newer homes, $4.40 for homes built from 1960 to 1978, $4.70 for pre-1960 homes, $6.40 for homes of other than wood frame construction and $7.95 for mobile homes.

For a typical home insured for $200,000, this means the new rate could vary from $500 to $880 a year in most of Los Angeles and Orange counties and from $720 to $1,280 a year in most of the San Fernando Valley.

However, there are scattered, low-risk parts of both counties, particularly southern Orange county, where the rates could be as low as 90 per $1,000 for newer homes.

Butler’s plan for lower rates drew varying reactions from two leading consumer organizations in the state.

Bill Ahern of Consumers Union declared, “We’re definitely in favor of these adjustments and we’re glad that the CEA has recognized the need for them.”

But Harvey Rosenfield, director of the Proposition 103 Enforcement Project, called the reductions insufficient.

“This is a sop to the policyholders designed to distract them from the fact that larger reductions are justified,” Rosenfield said. “The CEA is throwing us a few crumbs.”

The public hearings will continue on other issues, Butler said, and other rate adjustments remain a possibility.