Fairer Shake for Homeowners on Quake Insurance Rates

The new California Earthquake Authority has been controversial from day one, largely because under it homeowners have to pay more for less earthquake coverage than when the insurance was available only from private companies. Adding to the aggravation, homeowners in Southern California and elsewhere in the state are paying extra to help keep rates down for Bay Area residents, whose earthquake risk is deemed the highest. The state-run earthquake authority has now proposed a rollback in premiums to reflect new assessments of Northern California risks. That’s a good start toward fairness to consumers.

Still, unresolved questions persist about the rates, which were adopted last December when the state first began selling earthquake policies. The Legislature created the state agency to relieve private insurers of fulfilling a state mandate that they offer quake insurance to homeowners.

The agency, which is currently holding rate hearings, decided on the newly proposed premium cuts after concluding that risk factors were overstated for the Bay Area, especially in Napa and Sonoma counties. Last Thursday it recommended a statewide cut averaging 11% for homeowner rates. The decrease in the Los Angeles County-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%, while in Napa and Sonoma counties the drop would be 35%. But rates for Ventura, San Luis Obispo and Imperial counties would remain unchanged. If the CEA board approves the changes Tuesday as expected, 418,000 policyholders will receive credits or rebates averaging $62.

One part of the earthquake risk model used by the authority assumed that a large temblor in the Bay Area would “cascade” from one fault segment to another, thus increasing damage and monetary losses. State geologists, however, disputed this assumption, saying that it went far beyond the consensus of earthquake scientists in Northern California.

Are there other flaws in the risk model? Might rates be cut more? Consumer advocates believe so and continue to press the CEA for explanations of why premiums are based on ZIP codes and for the methodology used to translate earthquake hazard into loss projections. They would also like--and they deserve--a sharper accounting of administrative expenses.

Homeowners are obviously awaiting the answers; sales of the state policies have lagged compared to the old private policies. The state should settle on reasonable and affordable earthquake insurance rates that would present a persuasive incentive for homeowners to purchase the coverage.