POINT - COUNTERPOINT : DEBATING QUAKE COVERAGE INDUSTRY WANTS HANDOUT.

Byline: Betsy Imholz and Paul Carney 

In an era when government downsizing appears to be a popular theme, Insurance Commissioner Chuck Quackenbush is going against the grain.

The Republican commissioner and the state's largest insurers want to create a $10.5 billion public agency to sell residential earthquake insurance - the California Earthquake Authority.

Proponents contend the CEA will help jump-start California's real estate market by making homeowners insurance more available. But the biggest winners from the creation of such an earthquake authority would be the ``Big 3'' insurers - State Farm, Allstate and Farmers.

The state of California has already bent over backward to help the industry. Last year, the Legislature and Gov. Pete Wilson approved a massive legislative relief measure that reduces the industry's earthquake liability by 50 percent.

But that's not enough for the big insurers. They are threatening to cancel 1 million policies unless the CEA is approved. The threat has placed legislators in an uncomfortable position, particularly since the ``Big 3'' have about 60 percent of the homeowners insurance market.

The plan to create a state-run insurance entity is bad public policy. The plan places California, its homeowners, and ultimately, taxpayers at great risk since liability associated with earthquakes would be shifted from insurers to homeowners and the state of California.

In addition, insurers would escape paying taxes on earthquake policies sold through the CEA, estimated at a loss of $23 million to the state budget annually.

At the heart of this debate is a 1985 law, sponsored by the industry, that requires insurers to offer earthquake coverage with every homeowners insurance policy they sell. The companies opted to take on writing earthquake policies in exchange for excluding all coverage for damage under general homeowners policies.

This was a smart business decision on the part of the industry since only 25 percent of homeowners buy earthquake policies while 100 percent have general homeowners policies.

After Loma Prieta, which hardly caused a dent in the industry's profit margins, companies began lowering the cost of earthquake policies and heavily marketed the product throughout the state.

By 1994, the insurers had sold too much, overexposing themselves in the California property insurance market. Regardless of earthquake insurance risks, the ``Big 3'' needed to decrease their homeowners insurance exposure in the state.

Then Northridge hit with residential claims losses totaling more than $8 billion. Many companies stopped selling or severely restricted selling new homeowners policies and they used Northridge and the requirement to offer earthquake insurance with homeowners policies as an excuse to withdraw from the California homeowners market.

As a way of further curtailing their earthquake business, the companies developed a proposal for the state to take over the risks that the companies had created by aggressively selling earthquake insurance.

Here's how the Authority would work: Insurers with at least 75 percent of the state's residential property market must participate in the CEA in order for it to become operational. Insurers would be required to contribute as little as $750 million.

Additional funding would come from several layers of assessments on insurers (which they admit will be passed on to their other policyholders) and on CEA earthquake policyholders directly. Funding also would be sought from private investors and from re-insurance companies.

Participating insurers would no longer write residential earthquake insurance. The CEA would sell earthquake policies to homeowners. According to the Department of Insurance's initial projections, consumers would pay far more for CEA policies than for policies currently offered by the private market. After realizing this wasn't politically smart, the department lowered the estimate of the cost for a CEA policy.

CEA will charge consumers high prices to cover the costs of creating a new agency, purchasing costly reinsurance; and paying private investors (e.g. insurance companies) a 21 percent rate of return on their CEA investments.

In the event of a major earthquake, the CEA could not pay claims until it accurately assesses the total cost of damages. This could take months, possibly years.

CEA policyholders would face assessments of more than 20 percent of their annual premiums for as much as 10 years after an earthquake if the funds fall short. To add insult to injury, if there are not enough funds in the CEA, homeowners would only receive partial payout on their claims. This is not insurance.

Before rushing into the creation of a new government agency, the Legislature should conduct a thorough review of a new law that allows companies to sell ``no-frills'' earthquake policies to meet the requirement that they offer earthquake coverage.

According to the Insurance Department, the privately-offered ``no-frills'' policies will cut earthquake liability for companies by half. The Department and insurers agree that the ``no-frills'' policies, given time, will allow the homeowners market to open again.

Creating a new earthquake insurance agency to bail out California's biggest insurers is a threat to consumers and taxpayers, not a help.

MEMO: Betsy Imholz is the Special Projects Advocate for Consumers Union's West Coast Regional Office. Paul Carney is a former intern with Consumers Union, and a graduating senior from Stanford University.