Calif. Earthquake Bill Receives Criticism, Could Raise Rates

Critics of a bill recently signed by Gov. Arnold Schwarzenegger say more than 760,000 California homeowners who buy earthquake insurance through a state-run authority could see their premiums rise .

But the measure’s supporters say that without the legislation homeowners could be hit with even bigger rate increases.

The measure by Sen. Mike Machado, D-Linden, creates a new $1.3 billion underwriting requirement for insurance companies participating in the California Earthquake Authority program. That $1.3 billion requirement will replace a $2.2 billion insurance industry commitment that’s scheduled to expire on Dec. 1, 2008.

State Treasurer Bill Lockyer initially opposed the legislation, predicting it would force a raise in rates by another 8.5 percent to make up for the potential loss of industry contributions. Right now, they average about $700 a year.

He urged lawmakers to extend the $2.2 billion obligation until the authority builds up $6 billion in cash reserves. Currently it has only $2.7 billion. And Lockyer eventually dropped his opposition to the bill after supporters abandoned a proposed provision that he said likely would have led to an increase in earthquake insurance rates, a legislative aide told the Associated Press.

But Machado said the $1.3 billion obligation was the best compromise that he could work out with the politically powerful insurance industry.

He said that an extension of the $2.2 billion requirement could have driven insurers out of the state. Without the $1.3 billion replacement, homeowners would face average rate hikes of 20 percent, he predicted.

Tim Richison, the authority’s chief financial officer, said the likelihood of a rate increase with the smaller industry underwriting obligation will depend on how much the authority has to pay for reinsurance it buys to help cover its claims.

Under Machado’s bill, the $1.3 billion underwriting obligation will be phased out over 10 years, although the phase-out could be suspended for up to two years if the authority is forced to pay at least $500 million in claims because of an earthquake.