State Plans Cut in Quake Premiums

In an effort to get more homeowners to buy earthquake insurance, the California Earthquake Authority on Thursday proposed changes in premiums for next year that would result in an average rate reduction of 22% statewide.

The reduction, which could save some policyholders hundreds of dollars a year, would be the first since 1999, when premiums were cut by 4.5%.

The state hasn’t been hit by a major temblor in more than a decade, enabling the earthquake authority -- which underwrites about two-thirds of the earthquake insurance in California -- to build its cash reserves. It currently has the ability to handle damage claims of as much as $7.2 billion -- half of which would come from private insurers.

State Treasurer Phil Angelides, one of three state officials who make up the authority board and a gubernatorial candidate, noted that only 15% of eligible California homeowners buy earthquake coverage. He blamed high premiums and standard deductibles that could leave homeowners on the hook for the first 15% of repair costs.

“By lowering the cost of earthquake insurance, we hope more California homeowners will be able to buy coverage and protect their homes and family finances from earthquake losses,” Angelides said.

The proposed rates, which must be approved by Insurance Commissioner John Garamendi, would vary greatly across the state -- and some policyholders would see their bills go up.

Residents of some parts of Beverly Hills and Los Angeles would get an average 33% cut in their earthquake insurance bills, while some residents of San Francisco, which was last rocked by a major temblor in 1989, would get an average 24% reduction.

But Palm Springs homeowners could see their premiums jump by an average of 65%, while policyholders in Eureka, near the northern end of the San Andreas Fault, could be hit with a 35% boost in premiums.

Overall, the proposed rate changes would save money for an estimated 85% of the earthquake authority’s policyholders. Current rates, which average $550 a year statewide, could drop by $100 to $600 for about 620,000 homeowners, depending on where they live and the type of construction of their residence.

Variations in premiums could result from a number of factors used in the state’s complex actuarial formula, said Stan Devereux, a spokesman for the earthquake authority. Variables include a house’s size, the number of stories, construction style and age as well as soil data, seismic activity records and other geological information, he said.

Earthquake authority Chief Executive Elaine Bush said development of the new rates represented “the latest, state-of-the-art scientific and engineering data.”

The premium changes would take effect July 1. They would affect only single-family homes and wouldn’t apply to condominiums or mobile homes.

Garamendi, who promised a speedy review of the proposed changes, said he backed the move. “This is the right direction for rates to go,” said the insurance chief, who also has a seat on the authority board, as does Gov. Arnold Schwarzenegger.

Insurance companies, however, told the authority board they supported a 12% to 13% rate decrease instead of the 22.2% cut that Garamendi would consider.

“A more measured approach might be a better way,” said Bob Downer, an actuarial expert hired by the state’s three top insurance trade organizations.

Part of the rate reduction proposed is based on a sharp drop in the earthquake authority’s annual bill for reinsurance, or specialized coverage purchased by insurers to lower their exposure to risk. But reinsurance rates, which are at an all-time low, are volatile, Downer noted. Lowering earthquake premiums by 20% now, he said, increases the possibility they will have to be raised in the future.

Consumer groups applauded the planned cuts. “This decrease will mark the beginning of an essential expansion of coverage in the state,” said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

The Legislature created the earthquake authority in 1996 as part of a deal with private insurers, which had been hit with $12.5 billion worth of claims by residential homeowners after the 1994 Northridge quake.

Insurance companies wanted to be relieved of what was then a legal obligation of offering earthquake policies to homeowners. Fifteen insurers, representing the bulk of the market, affiliated with the authority. Other companies, however, still underwrite their own earthquake policies.

The cuts should not affect the authority’s ability to pay claims, even after 2008, when a portion of the insurance industry’s liability is reduced, said Clark Kelso, Schwarzenegger’s representative on the authority board.

“We could manage the Big One,” he said. “We are confident that the CEA has the claims-paying capacity to handle that.”

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Seismic shift

A sampling of proposed changes in earthquake insurance premiums for California Earthquake Authority policyholders:

*--* City ZIP Code Current rate* New rate* Change Los Angeles 90049 $2.52 $1.69 -32.9% Beverly Hills 90210 2.80 1.89 -32.5 San Francisco 94158 4.38 3.31 -24.4 Eureka 95534 1.94 2.61 +34.5 Palm Springs 92263 1.75 2.89 +65.1

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*Per $1,000 of assessed value for homes

Sources: Assn. of California Insurance Companies, California Earthquake Authority