As Californian's look at their finances for 2013, several thousand homeowners will see savings on their earthquake insurance premiums.  As a result of California's insurance reform law – Proposition 103 – Californian's who purchase earthquake insurance from Chubb or Chartis will be saving a collective $12 million in 2013 after these insurance companies were ordered, late last year, to reduce rates by 15%.

With about 14,000 policyholders, these companies represent about 15% of the private earthquake insurance market in California, though they are dwarfed by the California Earthquake Authority, a quasi-public agency with 50% of the earthquake insurance marekt in the state.

Proposition 103 rules require auto, home and business insurance companies to submit rates for review and approval before they take effect. The law also allows members of the public to participate in rate proceedings and challenge excessive rates. Consumer Watchdog used that public participation rule to successfully challenge the insufficient rate decreases proposed by Chartis and Chubb and create more savings for Californians.

As my colleague, Consumer Watchdog's Litigation Director Pamela Pressley explained: "With the devastation and cost of disasters especially evident in the wake Superstorm Sandy, we have to make earthquake insurance more affordable for Californians. By challenging these rate proposals, we have made sure that insurance companies are not overcharging policyholders for their earthquake coverage.”

Chartis originally requested a 0.6% overall rate decrease, and Chubb had requested a 5% rate decrease. Consumer Watchdog challenged those initial proposals arguing that the decreases were insufficient (see below for details). Insurance Commissioner Dave Jones ordered a 15% rate decrease for 7,378 Chartis Property Casualty policyholders, and a 15.46% decrease for 6,868 policyholders with three Chubb subsidiaries: Federal Insurance, Pacific Indemnity and Vigilant Insurance Companies. Although rates will be coming down for the majority of policyholders with both companies, some policyholders with each company (about 25% of Chubb customers, for example) face increases next year.  The number of policyholders facing increases and the size of the increases are substantially less than was originally proposed by the companies.

Consumer Watchdog has used the rate challenge process to save Californians $2.2 billion since 2003 on their auto, home, earthquake and medical malpractice insurance premiums.  View a chart of savings from Consumer Watchdog challenges.

Consumer Watchdog challenge reveals serious flaws in proposed earthquake insurance rates

Consumer Watchdog’s investigation of the proposed earthquake insurance rate decreases by Chartis and Chubb identified several reasons that the rates should be lowered even more than proposed. The nonprofit group found that both insurers chose to select data favorable to the companies but not the most accurate or appropriate way to develop rates. Among other problems with the proposed rates, Consumer Watchdog found that:

• Chartis wanted to set rates based on an earthquake model that led to the highest premiums, even though the company had predicted loss data from three models; Consumer Watchdog said rates should be based on an average of the three models to avoid the possibility that the selected model is an outlier that overstates predicted losses;
• Chubb overstated the reasonable projected cost of the insurer’s effort to fight it’s customers’ claims (known as Defense Cost Containment Expenses); and
• Chubb also sought higher premiums to account for the company’s purportedly high quality customer service. This request was rejected in response to evidence produced by Consumer Watchdog showing that Chubb was ranked below the homeowners insurance industry average on a customer satisfaction survey by J.D. Powers and its Federal Insurance Company ranked 48 out of 50 large insurance companies offering homeowners insurance in California.

Other issues:

• In response to Consumer Watchdog’s objection regarding excessive reinsurance costs being included in their requested rates, Chartis dropped the amount of reinsurance costs included in the rate from over 40% to under 30% of gross premiums. 
• In response to Consumer Watchdog’s objections to changes to its classification system that resulted in premium changes to individual policyholders ranging from +182% to -73%, Chartis agreed to cap rate increases at 20%.  Chubb also agreed to 20% cap on increases in response to objections to its original filing, which contained individual premium increases up to +167.8%

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