California Insurers Keep Feeling AftershocksNanette Byrnes
When the Northridge earthquake hit on Jan. 17, it literally shook 20th Century Industries to its foundations. At the insurer's headquarters in Woodland Hills, Calif., power was out and phone lines were dead. Within 72 hours, the company had set up a makeshift camp in its parking lot and was processing claims from the 150,000 Los Angeles homeowners that it insures.
Residents are rebuilding their city. But for 20th Century and other insurers in California, the ground is still shaking. They're beset by irate homeowners, realtors, and regulators--not to mention huge loss claims. Crippled by excessive concentration in the areas hardest hit by the earthquake, 20th Century on Sept. 8 raised its estimated payout from the quake to $815 million from $685 million--raising concerns about the company's survival. Worse yet, fearing similar fates, casualty insurers are stampeding for the borders, which could further weaken the state's sluggish economy.
WRITERS' BLOCK. Over the past few months, insurers of more than 60% of the state's homeowners, including 20th Century's insurance units, have either left or stopped writing new business. "We are in the early stages of a full-blown insurance availability crisis," says state Insurance Commissioner John Garamendi. State Farm Insurance Group, the leader, with 21% of the market, will write a new policy only when an old policyholder leaves. Allstate Insurance Group and Farmers Insurance Group, No.2 and No.3, are not writing new policies--period. Others are tightening requirements.
This in turn could produce a homeowner backlash. Policy cancellation notices are expected to hit consumers in force this fall--just as state legislators are campaigning for reelection. Garamendi will hold hearings Sept. 28-29 on the crisis.
The cancellations have the state's realtors up in arms. To them, the insurance pullout threatens to crimp the nascent housing recovery. Pat Neal, president of the California Association of Realtors, sees the exodus as a political ploy--an attempt to pressure legislators to overturn a California law requiring insurers that sell lucrative homeowner coverage also to provide risky earthquake coverage. "It's blackmail," she says. "Even with a 41/2-year recession, we're still the eighth-largest economy in the world. Do you think they'd give this up?"
Insurers also have to deal with Garamendi, a longtime foe, who is trying to figure out how to keep them in the state. He says he'd be willing to lift the earthquake requirement if insurers contributed to an earthquake-insurance pool to provide coverage for those who could not otherwise find it. A federal bill that would accomplish the same thing on a nationwide basis is moving too slowly through Congress to help California.
RISKY RATIO. Meantime, Garamendi's office is battling Farmers Insurance, which raised its earthquake deductible for most of its California policies from 10% to 25% of insured value on July 15. Garamendi's staff contends that such a high deductible amounts to a refusal to write policies. And 20th Century is tussling with Garamendi's office over the $119 million it's required to refund to policyholders under Prop 103's 1988 premium rollback.
The $119 million refund, which a state court upheld in August, is just one of 20th Century's problems. Its premium-to-surplus ratio, a solvency measure regulators use, has dropped to at best 8 to 1, far below acceptable levels of 3 to 1. Long term, the company, which has been one of the most successful auto-policy writers in the state, will either have to issue stock or find an outside investor. But even that will be tough: Rating agencies recently cut its debt rating, causing the stock to lose 25% of its value.
As 20th Century struggles to survive, it stands as one more reminder of the devastation of the quake. The repair work is still ongoing at its headquarters. But it will take more than glass and concrete to strengthen the shaky bonds that now link California to its skittish insurers.
HUNKERING DOWN Homeowner policy writing status of 10 largest California insurers Company Market Status share* STATE FARM 21.3% Replacement INSURANCE GROUP policies only ALLSTATE INSURANCE 17.3% No new GROUP policies FARMERS INSURANCE 13.4% No new GROUP policies CALIFORNIA STATE 4.1% Still writing AUTO ASSN. FIREMAN'S FUND 3.1% Still writing INSURANCE * Market share percentages based on 1992 premiums Company Market Status share* UNITED SERVICES 3.0% Still writing AUTOMOBILE ASSN. SAFECO 2.7% No new INSURANCE policies FEDERAL INSURANCE 2.5% Still writing (CHUBB) 20TH CENTURY 2.2% Withdrawing INSURANCE completely REPUBLIC INSURANCE 2.0% Withdrawing GROUP completely DATA: CALIFORNIA INSURANCE DEPT.