City-funded fire insurance gets California tryout

The year: 1990. But it could even be 1981. John Q. Homeowner goes to City Hall to pay a bill -- fire insurance on his home.

As preposterous as it may sound, the idea of cities selling insurance is being taken seriously by researchers, municipalities, and at least one insurance company in California.

"There is a great deal of interest nationally," says Bill Hanna, a staff member of Mission Research Corporation in Santa Barbara.

"But fairly typically everyone is waiting to see what California does. They'll let California plow the ground and learn from this state's mistakes."

Mr. Hanna recently completed a draft report on municipal fire insurance (MFI) funded by a $350,000 grant from the United States Fire Administration.

Mission Research also wrote the report that initially aired the concept of MFI three years ago in a study sponsored by the Institute for Local Self-Government in Berkeley.

Under the present system, the insurance industry rates cities on the adequacy of their fire protection, basing the evaluation heavily on the amount of equipment and manpower fire departments posses.

Consequently, there is no incentive for fire departments to cut down fire losses through prevention programs, the report writers said. They contended that cities with low fire losses were subsidizing cities with greater losses, resulting in homeowners of both cities paying comparable insurance rates.

Homeowner fire-insurance premiums could be reduced by low-loss cities offering their own insurance, the report said.

Theories on municipal fire insurance run the gamut from mandatory citywide participation, with the city acting as the underwriting agent, to the other end of the spectrum in which the city contracts out the underwriting to an insurance company with voluntary participation by homeowners.

The former is seen as impractical, if not illegal, by even MFI proponents. Most cities would not be willing to fight the political battles they would surely be confronted with in starting a mandatory insurance program.

The latter is the most likely method of implementation. One insurance company already has worked out a scheme on this basis. However, most insurance companies oppose the concept altogether.

The major pitfall is a catastrophic loss, such as the recent San Bernardino fires in southern California, according to Dave Simmons of the Insurance Information Institute in San Francisco.

"The advantage of placing cities in a risk classification pool is that when you have a catastrophic loss, the next year's premiums would not be raised considerably.

"It levels out rates. By putting cities in a group, you get rid of the peaks and valleys of good years and poor years for individual cities."

Although State Farm, one of the nation's largest insurance firms, is aware of MFI research, it has no official position "other than amazement," reports Wes Ooms, vice-president of product planning and development.

"In the complex field of insurance, the idea that people with no experience and background in the business want to provide insurance is amazing," he goes on.

"We feel we have gotten professional about the business. We have acquired an expertise, and we think experts should be the ones to handle the business."

Richard Zizian, marketing director for Avco Financial Insurance Group, the sole insurance company interested in MFI, countered that he has devised a plan that overcomes the obstacles cited by other insurers. Mr. Zizian's plan call for the city to contract with an insurance company to provide voluntary insurance coverage to homeowners while the city's police and fire departments emphasize prevention programs.

The plan takes in the traditional homeowner's package. Without it MFI would flounder because homeowners would not buy fire insurance from one agent and theft or liability insurance from another.

By working closely with homeowners, fire departments can curtail fire losses through education and inspections, resulting in premium savings of 5 to 15 percent, asserts Mr. Zizian.

The premium money pays homeowners for their losses. Some of the money also can be used to subsidize public safety departments, according to Mr. Zizian.

"If a municipality contracts with us as a carrier, we provide all the expertise, the computers, and the experience for a set fee. The city provides the security and the prevention. The more prevention there is, the less money paid in claims, the more money the city has. The city has an incentive."

Mr. Zizian calculates that Avco would charge a city 30 percent of every premium dollar for administrative costs and its profit, leaving 70 cents of every dollar to pay claims, which he estimated at 50 cents.

"Twenty cents would go to the city," he says says. "That's what is revolutionary. Here we're turning the profit back to the city."

If contracted, Avco would reinsure itself like any other insurance company does to cover catastrophic losses, according to Mr. Zizian. Local independent agents would write the individual policies.

So far Avco has received inquiries from more than 150 cities but will be working with several key cities first. The company expects the city of Orange in southern California to offer homeowners insurance through his company sometime this year.

To Rod Sackett, Orange's management services director, MFI looks like a "win-win situation."

"From the city's standpoint," he says, "it would help fund police and fire costs which have escalated fast. For homeowners, they would be paying less on admission into the program, and maybe a lot less two to thr ee years later when actuarial data has been accumulated."