The privately financed, publicly managed agency, known as the California Earthquake Authority (CEA), was proposed after the 1994 Northridge earthquake, which killed 60 people and caused $12.5 billion in insured losses in the Los Angeles area and prompted many insurers to bow out of the California market.
The CEA was designed to end a shortage of earthquake insurance and reinvigorate the market for homeowners' coverage, state officials said. If successful, the authority could become a prototype for similar agencies in other states, experts said.
Greg Butler, interim chief executive officer of the CEA, said the $7.5 billion agency should begin providing insurance through the state's residential insurers.
We are on target to begin operations on Monday, Butler said, adding full operations would be phased in over 15 months.
In its first month of operation, the authority was expected to issue about 10,000 earthquake insurance policies. Once fully operational, Butler said the authority could handle up to 1.7 million earthquake policies.
For the first time in a long time every Californian who wants an earthquake policy will be able to get one, he said.
The authority's insurance policies will be written and serviced by private insurers, but the CEA will issue the policy, pay earthquake claims and assume much of the risk.
In turn, the insurance industry has agreed to contribute an initial $700 million to fund the authority and would be obligated to make additional capital commitments to pay claims in case of a quake.
The legislation creating the authority was signed by Governor Pete Wilson in September after more than a year of wrangling between lawmakers, insurers and consumer groups.
Proponents of the plan argued the agency would go a long way toward easing the coverage shortage. Without homeowners insurance, buyers in many cases cannot obtain a mortgage to buy a new home. That has hurt the market for new homes, affecting builders and millions of other Californians whose livelihoods are tied to the housing industry.
Once the CEA is up and running, there will be a healthy homeowners market again, and that is critically important if our economy is going to continue its recovery, said Richard Wiebe, spokesman for California Insurance Commissioner Chuck Quackenbush.
Consumer groups argued the authority was not financially sound. If we get two big earthquakes this thing will not have any money in it, warned Bill Ahern, a policy analyst with Consumers Union.
While an earthquake could cause enough damage to bankrupt the CEA, Quackenbush said this was highly unlikely. In its first year of operation, the CEA will have enough resources to pay all claims from an earthquake more than twice as destructive as the Northridge earthquake, he said.
The CEA will be financed with premiums paid by those who buy earthquake coverage, cash from participating insurance companies, commitments from participating insurers and reinsurance, which insurers use to reduce their risks.
The authority has secured about $3.5 billion of reinsurance and was expected to purchase about $2.5 billion of that amount, according to Jack Graham, the authority's reinsurance broker.
After the Northridge earthquake, which caused losses more than four times the earthquake premiums collected by all insurers from 1969 through 1994, insurers across the country have grown increasingly worried about their exposure.
There are lots of places in the country that have exposure to catastrophic events, said Graham. The CEA is being viewed as a prototype, he added.