California Earthquake Authority To Consider Rate Decreases At Closed Session

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By Consumers Union on Thursday, July 17th, 1997

July 17, 1997

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CALIFORNIA EARTHQUAKE AUTHORITY TO CONSIDER RATE DECREASES AT CLOSED SESSION
Consumers Union Petitioned for Current Hearings on Rate Structure

SAN FRANCISCO, CA — The Governing Board of the California Earthquake Authority (CEA) will meet this Friday, July 18, in a closed session to discuss possible changes to the earthquake insurance rates that are currently the focus of hearings before the Insurance Commissioner. Consumers Union and other consumer groups participating in these hearings through “intervenor” regulations have testified that rates are excessive and should be reduced.

Due to changes made in earthquake predictions by the CEA’s experts, the Board could decide to amend the CEA rate application to reduce rates in the Bay Area. The Board could also decide to reduce rates statewide due to other revisions in earthquake damage predictions that have emerged in the extensive CEA rate hearings at the Insurance Department.

“Consumers Union believes that current CEA rates are excessive and unfair and should be reduced,” said Bill Ahern, Consumers Union senior policy analyst who has been participating as an expert witness at the hearings. “We’re glad the CEA Governing Board is considering such a reduction because of the changes in earthquake predictions. However, the current public hearings have pointed to many additional reasons the CEA should consider further rate decreases.”

After the CEA became operational with interim rates last December, Consumers Union petitioned the Insurance Commissioner to hold evidentiary public hearings on the CEA rates. CEA legislation and Proposition 103 allow eligible consumer groups to intervene in this manner. In January, the Insurance Commissioner granted the Consumers Union petition for hearings. In February, additional consumer groups, insurers, the Insurance Department staff, and the Seismic Safety Commission also petitioned to participate in the hearings. Consumer groups may be compensated for their work after a final decision if the Insurance Commissioner finds the groups made a substantial contribution to the proceedings and did not duplicate the work of other participants.

The complex public hearings on the CEA’s original rate application began in May and will likely end in August. The Insurance Commissioner may issue a final decision on rates in December.

As reported last week in the media, EQECAT, the CEA’s experts on earthquake damage predictions, filed testimony on July 10 indicating it has revised the method used to predict earthquakes on Bay Area earthquake faults. This change lowers the predicted damage that will be caused annually, and has inspired public discussion of an immediate decision by the CEA Governing Board to recommend lower rates.

However, this is only one of several possible rate decreases to which CEA experts have already agreed during the hearings. Other changes include the following:

· An adjustment that would reduce CEA earthquake loss by about 4%, or $50 million. In expert testimony filed June 23, the CEA’s actuarial expert, John Drennan, agreed to changes that reflect Consumers Union’s concerns, raised during the hearings. Because of a $5000 limit in the CEA policy on replacing chimneys and limits for other structures such as sidewalks and patios, the predicted losses to the CEA are less than originally calculated.

· A further decrease in costs due to a recalculation of possible claims losses above the CEA’s first-year claim-paying capacity — a $14 million reduction.

Other issues regarding CEA rates are still pending and should play a role in the final rate structure. For example, the expert testimony of Consumers Union estimates that rates should decrease 22% to avoid excessive rates. Consumer intervenors assert that high rates are due to excessive expenses for member insurance companies; overestimates of demand surge increasing construction costs after large earthquakes; overestimates of claims payments; the high cost of reinsurance; and failure to include investment income.

“There are millions of dollars of potential savings and refunds for CEA policyholders at stake during these hearings,” Ahern said. “These hearings are also critical to public confidence in the CEA, which is the near monopoly provider of residential earthquake insurance in California. We expect the CEA Governing Board and the Department of Insurance to take action in response to the full public hearing record and the many arguments for a significant rate decrease.”

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