Risky Business
Big insurers rig the game to avoid covering people likely to file claims
That's why the industry brokers deals in statehouses. In California, it was disaster of another kind that triggered a classic industry squeeze play. In January 1994, the ground ruptured about 11 miles beneath Los Angeles's San Fernando Valley, loosening a 6.9 magnitude quake that caused more than $12.5 billion in losses. Afterward, the homeowners insurance market virtually dried up, as insurers refused to write coverage or charged prohibitively steep rates. Industry executives began to rail about a requirement that insurers offer quake coverage along with homeowners policies. Even some consumer advocates acknowledged the industry needed some relief if that requirement was to be kept.
But what happened next gave insurers more than a little relief. Under intense pressure from the industry--plus builders, bankers, and Realtors--legislators twice approved bills shearing insurers' liability by billions. Consumer advocates called it "corporate welfare" and the biggest bailout in the state's history.
The industry's quake-insurance blitz in California between 1994 and 1996 was well-coordinated and well-financed. Hundreds of thousands of dollars in campaign contributions came at key intervals; at one point, consumer advocates called on legislators to stop work on the issue until the latest batch of campaign contribution reports could be examined to see just where the industry was dispensing its cash.
Clout. As crucial details were being worked and reworked, upwards of 50 industry lobbyists joined the battle, which included closed-door meetings with top insurance officials. In 1995, insurers won Round 1, persuading lawmakers to allow them to offer stripped-down quake coverage that greatly reduced their potential losses. A year later came Round 2, as lawmakers approved creation of a special plan, the California Earthquake Authority, which cleaved off still more risk. When the deal was done, executives touted the authority as a national model.
Insurers say they had no choice but to shift the burden. "The magnitude of the earthquake liability and risk was so unquantifiable," says Jeffrey Fuller, executive vice president of the Association of California Insurance Companies, an industry group. Insurers' ability to erase tens of billions in possible exposure underscores a business axiom, says Harry Snyder, a consumer advocate who opposed the quake authority. "Companies make more money by going to Congress and state legislators than by designing better products and service," he says.
If insurers aren't bearing as much risk, then who is? In Florida, for example, property policyholders could be on the hook for billions of dollars in emergency assessments if another hurricane hits. "It's not going to be fun," says Jay Newman, executive director of the Citizens Property Insurance Corp., as the post-Andrew special plan is known. "Hopefully, it will be something people can afford." In California, only about half as many people are even bothering to take out policies. That gap could mean economic calamity if a big quake hits. If the quake authority runs short of money--which it well might--it isn't even obliged to make good on its policies. What's more, five years from now, the law permits insurers to walk away from another $2 billion in potential losses. "The industry did not want to be on the hook forever for that," says Tim Richison, the quake authority's chief financial officer.
advertisement
