CONSUMERS NEED AN ALTERNATIVE TO EARTHQUAKE INSURANCE PLAN.

Byline: Herschel Rosenthal

EFFECTIVE June 1, 1996, Insurance Commissioner Chuck Quackenbush severely restricted the availability of homeowners insurance in California, leaving thousands of homebuyers at risk. Quackenbush did this by sharply limiting the availability of coverage through the state's FAIR Plan - the ``insurer of last resort.'' This decision clearly put the insurance industry's interests above consumer interests.

Under Quackenbush's order, the state FAIR Plan may sell policies only in limited, designated brush fire areas and in under-served, inner-city ZIP codes. Homeowners currently insured through the plan may renew their policies regardless of their location, but everyone else is shut out. Quackenbush's decision threatens to trigger a devastating impact on the real estate market, threatening California's economic recovery.

The FAIR Plan, which stands for ``fair access to insurance requirements, is the last option for homebuyers who are unable to get insurance in the private market. This insurance program is administered by the California FAIR Plan Association under the supervision of the insurance commissioner.

As many private insurers restricted the availability of homeowners coverage following the 1994 Northridge Earthquake, many Californians turned to the FAIR Plan. In the event of a major disaster, where the plan has insufficient funds to pay claims, FAIR Plan assessments are levied against private insurers, depending on their size and market share, to help pay those claims.

In his announcement restricting homeowner access to the plan, Quackenbush argued that his decision was necessary to protect consumers from the risk of not getting paid for their FAIR Plan claims.

Quackenbush claimed that with just over 3 percent of the homeowners insurance market, the FAIR plan is dangerously overextended. That was news to the Legislature. Earlier this year, the Assembly passed AB 1754 by Assemblyman David Knowles, R-Cameron Park, who is chairman of the Assembly Insurance Committee. AB 1754 caps the amount of homeowners insurance that can be written by the Fair Plan to 6 percent of the market.

The Knowles Bill was supported by the insurance industry, including the Personal Insurance Federation which stated that ``We believe that AB 1754 will ensure that the number of earthquake policies sold within the California FAIR Plan do not grow to a large and unmanageable proportion.''

In other words, the insurance industry industry, which is at risk due to the FAIR Plan's extraordinary growth, has indicated that the FAIR Plan's current exposure could almost double before we reached a danger point. Quackenbush has never opposed AB 1754.

So why did Quackenbush suddenly decide to restrict the FAIR Plan to about 3 percent of the market while the insurance industry supported a 6 percent cap? The answer is that Quackenbush is more interested in putting political pressure on the Legislature to adopt his flawed California Earthquake Authority proposal than in responding to any immediate crisis facing the FAIR Plan.

Quackenbush is sponsoring a CEA bill, supported by insurers, which would provide a government bailout for insurance companies and less protection for policyholders. The CEA would create a $10.5 billion program run by a new government bureaucracy that would be in the business of selling earthquake insurance policies, thus shifting this enormous risk from the private sector - the insurance industry - to government.

With the undercapitalized CEA, policyholders would face the likelihood of partial claim payments if major disasters exceeded program funding.

Now we face a real insurance availability crisis, orchestrated by Quackenbush, which will either jump-start his stalled CEA that favors insurers or cause the Legislature to take alternative action to protect consumer interests. My vote is for alternatives to help consumers.

I intend to support legislation imposing a 6 percent cap on the FAIR Plan which would rescind Quackenbush's decision to restrict homeowner access to this program. I will also recommend that the bill become an ``urgency'' measure which will become effective immediately upon approval by the governor. The adoption of this bill will temporarily reopen the FAIR Plan and end the chaos in the homeowners insurance market precipitated by Quackenbush's decision.

That emergency action will also give the Legislature additional time to come up with a sensible long-term solution to our homeowners and earthquake insurance problems.

As an alternative to Quackenbush's insurance-favored CEA, I have proposed the creation of a $14 billion California Earthquake Reinsurance Authority. Under the CERA, state government would not be in the business of selling earthquake insurance.

Instead, CERA would be a ``reinsurance'' program providing a government backstop only after major earthquakes. The insurance industry would remain responsible for about the first $5 billion in damages before the CERA would kick-in to help pay policyholder claims. The larger $14 billion capacity of the CERA also reduces the risk that policyholders will face partial claim payments in the event of major disasters.

Consumer groups, insurance agents and the real estate industry have informed Quackenbush that his decision to prematurely cap the FAIR Plan was ill-advised. The only insurance crisis we now face is the one Quackenbush has created by virtue of this decision.

If he really cares about consumers and the California economy he should voluntarily rescind his decision. If he doesn't act on his own, hopefully the Legislature will enact an emergency bill overturning his FAIR Plan decision and adopt the CERA to ensure long-term consumer access to homeowners and earthquake insurance.

MEMO: State Sen. Herschel Rosenthal, D-Van Nuys, is Chairman of the Senate Insurance Committee.