The Phantom Meltdown

When something dies slowly, we often miss the final few heartbeats. And Lord knows, the death of earthquake insurance in California has taken its sweet time. But now, two years after Northridge, it appears the death rattle is at hand.

I’m talking about earthquake insurance as-we-knew-it. The kind that was offered at State Farm and Allstate, that gave you comprehensive coverage at a reasonable or even not-so-reasonable price.

Actually, most of us realized that new homeowners already were being laughed out the door when they asked for this kind of comprehensive coverage.

But we didn’t know that everyone else, even those who have insurance from the pre-Northridge days, will soon face the same fate. Oh, yes, it’s true. One way or the other, the old days are fast drawing to a close, and the new picture isn’t pretty.

Got earthquake insurance now that covers the replacement cost of your house? You won’t in the new era.

Got a 10% deductible on that policy, or better yet a 5%? Kiss it goodbye. In the new world everyone gets slapped with a 15% deductible.

Got coverage on the entire contents of the house, on the patio, on the pool? Got generous benefits on living expenses if your house is knocked flat? Goodbye to all that. Write when you find work.

In short, the new era will offer a mere shadow of the old coverage. And what will this lean, mean insurance cost? Hey, we got the numbers. If you have a house worth $300,000 in the Valley you will pay roughly $1,000 per year. And that’s not so bad. The same house in Oakland will cost $1,575 per year to insure.

You may ask how I acquired these factoids from the future. Easily enough. They are supplied by the state government which, thanks to the Republican majority in the Legislature, is on the verge of taking over the vast earthquake insurance industry in California.

The plan has been championed by another Republican, Insurance Commissioner Chuck Quackenbush. And if a legislative conference committee can resolve differences between the Senate and Assembly versions, a bill creating the California Earthquake Authority will go to yet another Republican, Gov. Pete Wilson, for his signature.

All this has been encased in a scheme so complex it could only be loved--and understood--by an actuary. But the underlying reality is simple: California Republicans will governmentize the earthquake insurance business, assuming most of the management and financial liability thereof. Oh, the irony.

Quackenbush and the Republican legislators say the takeover is necessary because the commercial insurance industry is refusing to write new earthquake policies and threatening to pull out altogether. Quackenbush, whose campaign for insurance commissioner was sped along by $2.3 million in contributions from insurance companies, has described the situation as “approaching meltdown.”

If you accept the meltdown scenario, a bailout by the state might make sense. After all, government often gets stuck with those crucial, messy jobs that cannot be handled by private business.

And no one would deny that the Northridge event exposed serious problems for commercial insurers. Chief among those problems is the lack of a reliable method to predict losses. The Northridge quake, at $12.5 billion, cost the industry more than twice what computer models had predicted. New models have now projected that a Kobe-size quake in California could hit $150 billion or more.

Fearing that kind of financial disaster, the insurance companies have moved to cut their risks across the board. They asked for, and received sharp increases in premiums for earthquake policies. They asked for, and received permission to shrink their liability for those policies by creating a “mini-plan” a la the description we offered above.

By most accounts, these changes have calmed down the insurance marketplace. Old policy holders are being rolled over into these new plans, albeit at a higher price and lower level of coverage.

That appears to be the new reality, and it’s ugly enough. But where’s the “meltdown” that requires a state takeover? It seems to exist only in the minds of the state’s Republican leadership eerily eager to governmentize. Quackenbush says the insurance industry has threatened to cut off 1 million--count’em!--homeowners if the state won’t take over most of their remaining liability by creating the California Earthquake Authority.

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Exactly which companies made these threats and which million customers were threatened? Quackenbush refuses to say.

And what do we hear from the Republican legislators who built their political careers on government downsizing and now find themselves up-sizing in a major fashion? Not a peep.

It’s clear why the industry wants the state to bail them out. It would take them off the hook and put the state on the hook. But why does California want or need to make that concession?

In hurricane-prone Florida, for example, the state has handled its insurance problem--one very similar to California’s--without a government takeover. Instead, it devised a plan to share liability with the industry when damages reach the gargantuan levels of a Hurricane Andrew.

And the U.S. Congress also is discussing a national disaster plan that would cover homeowners nationwide and have the capability of spreading the risk over the entire country.

What is wrong with either of these approaches?

We don’t know. We only know that we have arrived at the brink of a vast takeover based on the threat of a “meltdown.” A meltdown that cannot be seen, or heard, or felt.