California's 2 Million Homeowners with Earthquake Coverage Big Losers if California Earthquake Authority Approved; CEA Policies Will Not Provide Insurance.

SACRAMENTO, Calif.--(BUSINESS WIRE)--March 27, 1996--As the public's concern grows over the increasing influence of special interest groups on the Legislature, the powerful insurance industry pays no attention as it attempts to ram lawmakers into quickly approving measures that would shift earthquake-related losses onto the backs of California homeowners. The two CEA bills are AB 2086 (R-Knowles) and SB 1993 (D-Calderon), which are scheduled to be heard in their respective appropriations committees on Thursday, March 28. By threatening mass cancellations of homeowners policies, and restricting the sale of new policies, the industry's "manufactured crisis" has placed enormous pressure on the Legislature to approve the California Earthquake Authority bill by April 1 for fear of industry retaliation against homeowners.

"We urge lawmakers to put the brakes on this industry-driven rush for the CEA," said Betsy Imholz, Special Projects Advocate of the West Coast Regional Office of Consumers Union. "Instead of talking about ways to protect industry profits, we hope the Legislature will look at ways to protect the 1 million homeowners threatened with policy cancellations. The CEA is not the way to do that. Financing for the Authority would include high risk investments with the government and homeowners holding the bag if the CEA collapses. What a deal for the insurers."

Congress, as well as other states, that have looked at proposals similar to the CEA have all rejected them outright stating that government should not be in the business of writing disaster insurance. Nonetheless, Insurance Commissioner Quackenbush, who is shepherding the bills for the Big 3 insurers, Allstate, State Farm and Farmers claims that relieving the industry of its riskiest product -- earthquake insurance -- will bring companies back into the homeowners market. However, Quackenbush acknowledges that the CEA is only a quick fix, short-term solution.

To become operational, the Authority requires participation from 75% of the state's residential property market. These insurers would be required to contribute as little as $750 million in order to eliminate billions of dollars of earthquake insurance risk.

Additional funding would come from insurer assessments, which will be passed on to their other policyholders. CEA policyholders will also have assessments placed on them if CEA funds are depleted. Funding also would be sought from private investors and from reinsurance companies.

Commissioner Quackenbush claims that beginning April 1, $1.8 billion in commitments made by reinsurers will disappear. However, when the Legislature approved the bill last year to study the CEA, lawmakers did not commit to making CEA operational.

The groups stated that the April 1 deadline is self-imposed by Commissioner Quackenbush, that the Legislature never agreed to it and that lawmakers should not be pushed into hastily approving the creation of a state agency because of the urging of the Insurance Commissioner and the big insurers. To counter the Commissioner's claims, the groups pointed to Business Insurance, a trade magazine, which states that catastrophic reinsurance is readily available, and that prices for the product are decreasing.

Gina Calabrese, Senior Counsel of the Proposition 103 Enforcement Project said: "The way it stands right now, the public has been shut out of the legislative process on the CEA. It appears that deals are being made behind closed doors. One minute lawmakers are voicing their dislike for the CEA, and minutes later they're voting in favor of it. We are appalled that lawmakers continue to make public policy in this fashion."

Calabrese added: "The idea that we're in good hands with any of these companies is a farce, pure and simple. Allstate, State Farm and Farmers could care less how their earthquake policyholders fare in this debate. Prospective and current homeowners would be the real losers if the California Earthquake Authority is approved because the policies offered under the plan would not be true 'insurance.' In fact, if the proposed CEA is underfunded, policyholders could not only face partial payouts on their claims, but assessments on top of their premiums for years to come.

Last year, the Legislature and Gov. Wilson, concerned about the solvency of insurers, approved a measure that reduces company earthquake exposure by 50%. The bill, AB 1366, allows companies to sell "no-frills" earthquake policies, rather than full-scale policies to meet the state law that requires home insurers to offer earthquake policies. That new law has shifted 50% of earthquake liability onto policyholders. But insurers have stalled sales of these no-frills policies to keep insurance availability tight and thereby pressure lawmakers into passage of the CEA.

Imholz concluded: "The Legislature and Gov. Wilson should be commended for their effort last year that keeps earthquake insurance in the private market. The industry supported the no-frills policy, and they should allow it to work before talking about pushing the state into writing earthquake policies. Insurers acknowledge that the no-frills policy alone, within 1-4 years, will free up capacity and allow the homeowners market to correct itself. Why set up a $10.5 billion agency for such a short-term need when the market can handle it?"

CONTACT: Consumers Union

Betsy Imholz or Mariko Takayasu, 415/431-6747

or

Prop. 103 Enforcement Project

Gina Calabrese, 310/392-0522