POINT - COUNTERPOINT : STATE PROPOSAL IS VIABLE.

Byline: Chuck Quackenbush 

IF, as Aristotle said, ``Well begun is half done,'' then California is well down the road toward dealing with the vexing problem of affordable earthquake insurance.

The vehicle in this journey is the California Earthquake Authority, a publicly run but privately financed agency designed to provide earthquake coverage for the state's homeowners, condominium owners, mobile home owners and renters.

Last September, I sponsored and worked to craft legislation that would set forth guidelines for establishing the CEA.The result was AB 13 (McDonald, D-Carson), which was overwhelmingly passed by the Legislature. It established a framework for the authority and required that I obtain the financial commitments from insurance companies, reinsurance companies and the investment community that are necessary to guarantee the CEA's financial viability.

I have done what the Legislature asked me to do. A consortium of securities firms led by Morgan Stanley & Co. has been selected to raise $1.5 billion from private investors that will be used to pay earthquake claims if needed.

Private insurers representing more than 70 percent of the residential earthquake policy market in the state have agreed to commit up to $6 billion. E.W. Blanch Holdings Inc., an international reinsurance firm, has obtained over $1.8 billion in commitments from reinsurers around the world, the largest reinsurance placement in history.

Commitments from reinsurers are based on California's urgent need to resolve the earthquake availability crisis. Because of the demand for reinsurance throughout the world, some of these commitments expired on March 31, 1996 because enabling legislation had not yet passed the Legislature.

The Legislature must act now to pass enabling legislation to authorize the establishment of the CEA. As a public/private agency, the CEA would issue earthquake policies through private insurance firms and agents. It would settle claims, resolve disputes and determine policy costs.

The CEA's financial base would consist of up to $10.5 billion, put up by the insurance industry, policy premiums, reinsurance contracts, private investment capital and CEA earthquake policyholders. This will be enough to pay claims after an earthquake nearly 2-1/2 times as destructive as Northridge. Over time, and with Mother Nature's cooperation, the fund will grow even larger.

These are all key steps that are vitally important to the state's economic well-being. Since the disastrous January, 1994 Northridge Earthquake, private insurance companies representing 95 percent of the California homeowners insurance market have stopped or severely restricted issuing new homeowner policies.

Why? Because current state law requires insurers who sell homeowner policies to also offer earthquake coverage. But faced with potentially enormous economic losses in the case of a major earthquake, many insurance firms have decided to simply get out of the California residential market.

The decision has repercussions far beyond insurance. Many first-time home buyers or people ``moving up'' to new homes can't get mortgages because they can't get new homeowner insurance policies. That, in turn, hurts the housing industry, from Realtors to lenders to builders to subcontractors.

And it also makes it that much more difficult for California to attract out-of-state businesses.

So, why should the state be involved in the CEA? The answer is simple: taxes. In order to build enough reserves to pay claims, the fund has to be exempt from state and federal taxes. To get that exemption, the fund has to be a publicly managed entity. With state involvement, approval of the fund's tax-exempt status has been granted by Internal Revenue Service.

CEA is not a re-run of an earlier state program that, in the wake of the 1989 Loma Prieta Quake, was established to pay limited claims. That program, called the California Residential Earthquake Recovery Fund, was well-intentioned, but horribly flawed and severely underfunded.

The CRERF was bankrupt on the first day of operation. The CEA, on the other hand, can handle claims from an earthquake nearly 2-1/2 times the size of Northridge on the day it begins selling policies.

The CEA is better organized and better financed. So why doesn't everyone love it? Insurance companies are naturally concerned about the entrance of state government into the insurance business, and wary of the potential costs of the program to their firms.

Consumer groups are rightfully concerned about the cost-versus-coverage aspects of the plan, and how it might affect the homeowner who doesn't experience quake damage.

But outside of a national disaster plan that would rely on a nationwide pool, there is no other viable option that will ensure California homeowners have access to earthquake insurance and homeowners insurance.

Congress is considering a national plan, but it probably is years away. Without some version of the CEA, millions of uninsured Californians are gong to be facing catastrophic economic losses.

MEMO: Chuck Quackenbush is the California Insurance Commissioner.

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