Help for Homeowners in Next Quake

After the 1994 Northridge earthquake, insurers in California started running for the border. The earthquake caused more than $12.5 billion in insured losses, more than four times the $3.5 billion in earthquake premiums collected by all insurers from 1969 through 1994. Insurers paid out more than $2 billion in insured losses over those years, including $1 billion for the 1989 Loma Prieta earthquake.

As the marketplace began to tighten for homeowners insurance, one major insurer that had been pushed close to bankruptcy by the quake was forced to get out of the homeowners market. This meant that the company’s 170,000 policyholders would be searching for coverage beginning July 1, 1996. In addition, other companies left the state, leaving an additional 60,000 policyholders without coverage.

Couple this with the statutory requirement that insurers in California offer earthquake insurance with every homeowners policy sold, and you see why there is a near shutdown of the homeowners insurance market. The insurance industry’s solution was that the Legislature should drop the requirement that earthquake insurance remain available. That is unacceptable.

With the state’s economy just beginning to show signs of recovery, last summer I proposed a new approach to the shortage of homeowners insurance: creation of the California Earthquake Authority. It will be a privately financed, publicly run agency that requires 70% of insurers in the homeowners market to voluntarily participate and contribute up to $6 billion of the total $10.5-billion fund. It also includes as much as $2 billion in reinsurance--a process whereby insurance companies pay premiums to another company to cover claims above a certain amount--and $1.5 billion from private investors.

Despite the Chicken Little attitude of critics who say the CEA is underfunded and will fail, reinsurers and private investors do not put $3.5 billion in enterprises that are too risky.

The California Earthquake Authority will be established for one reason only: to receive exemption from federal income taxation so that all dollars placed in the agency can be used to pay claims. The IRS has already committed to this critical exemption.

If the CEA registers a loss, neither California taxpayers nor the state will be liable. In fact, the legislation expressly prohibits state or taxpayer involvement.

To be fair, policyholders in the agency could, if a mega-earthquake strikes, be charged an assessment. But had the CEA been in place in 1945, it would have been able to pay all earthquake insurance claims up to and including Northridge without a policyholder assessment.

Some consumer groups have objected to the limited policy being offered by the CEA. Yet, every major insurer is now offering policies with even less coverage. In fact, the 1995 mini-policy passed by the Legislature to mitigate some of the overexposure of insurers was supported by consumer groups as well as by those who support the CEA. Without the CEA’s mini-policy, the supply of homeowners insurance and quake coverage would continue to dry up. The mini-policy keeps the focus on the central asset, the home itself.

On the other hand, the FAIR Plan, which some consumer groups support, will not be able to survive a major quake. With assets of only $27 million, the FAIR Plan could not cover an estimated $10 billion exposure in Los Angeles alone, leaving policyholders unprotected even in a minor temblor and the rest of us on the hook to make up the difference. As a result, I restricted the FAIR Plan to the inner city and high density brush areas, as originally designated by the Legislature.

While opponents of the CEA would like to label it an “insurance industry plot,” the reality is that it has a statewide coalition of supporters, including legislators, policyholders, the California Realtors Assn., Bankers Assn., mortgage bankers, civic groups, laborers, builders, the state Chamber of Commerce and many local chambers.

Without homeowners insurance, buyers, in most cases, cannot obtain a mortgage to buy a new home. Without buyers for new homes, builders won’t build new homes and laborers will lose jobs. The Senate should join the Assembly and pass the CEA to keep the California economy growing and to reopen the homeowners market.