State Quake Insurance Called 30% Too High

The rates that the state insurance agency is charging homeowners for earthquake coverage are 30% too high--about $280 million a year--according to testimony by a Department of Insurance expert.

Responding to that contention by Robert Hunter, a nationally known authority, a spokeswoman for Insurance Commissioner Chuck Quackenbush said Thursday that the commissioner will act to lower the rates.

“We have found that there are some problems,” said Dana Spurrier, “but we believe they can be fixed, so the California Earthquake Authority policies will be more affordable, more available and less discriminatory.”

Quackenbush cannot act until public hearings, now in their second week, are completed, which may be about Aug. 1. In the meantime, millions of California homeowners will be offered earthquake policies at what the commissioner’s own expert and legal staff believe are excessive rates.

Hunter, a former Texas insurance commissioner and longtime consumer advocate, was emphatic Thursday in an interview from his Virginia home.

“There is no question their rates are in deep trouble,” he said. “It’s clear they are way too high. Their methodology in setting the rates, their calculation of loss costs, are out of kilter.”

In his presentation last week, Hunter also assailed the limits on the earthquake coverage offered by the new agency.

“The coverage represents unusually low payout of expected claims,” he said during his testimony. “Under 40% of the costs of larger earthquakes and little if anything on small earthquakes, leaving consumers and taxpayers significantly exposed.”

In addition to Hunter’s testimony and a memorandum by Quackenbush’s staff counsel Daniel M. Goodell, evidence has been presented at the public hearings that the rates, and the risk model upon which they are based, are unsound.

Representatives from the state Division of Mines and Geology and the Farmers group of companies, the second largest insurance seller in the state, raised questions during the sessions and expressed disagreement with the risk model, prepared by the private San Francisco firm of EQE International.

A spokeswoman for Farmers said Thursday that “the model doesn’t take into sufficient account soil type and proximity to faults.”

In contrast to Hunter, however, the Farmers representatives contend that in some areas the rates are too low.

The chief executive officer of the earthquake authority, Greg Butler, expressed concern in an interview Wednesday that the rates and the model upon which they are based might become “a political football.”

Butler said he found particularly troubling what he termed an about-face at the hearings by the Division of Mines and Geology and its chief, state Geologist James F. Davis, on whether the EQE model is sound.

Butler said the quake authority governing board established its rates last year in part because Davis said the model was sound. “Now, after 18 months of work, he’s saying something different,” Butler said.

But Davis said his agency had made clear that its earlier statements were preliminary.

In the background of the hearings is great unhappiness in the Bay Area about insurance rates that are almost twice the level of rates in Los Angeles--a base rate of $5.25 per $1,000 in coverage, as compared to $2.70 in most of Los Angeles outside the San Fernando Valley.