This measure would recognize a need for federal legislation that would establish guarantees of postearthquake financing for prequalified, actuarially sound state earthquake insurance programs, including the California Earthquake Authority, and would urge the President and Congress of the United States to enact that legislation.

This measure would recognize a need for federal legislation that would establish guarantees of postearthquake financing for prequalified, actuarially sound state earthquake insurance programs, including the California Earthquake Authority, and would urge the President and Congress of the United States to enact that legislation.

This measure would recognize a need for federal legislation that would establish guarantees of postearthquake financing for prequalified, actuarially sound state earthquake insurance programs, including the California Earthquake Authority, and would urge the President and Congress of the United States to enact that legislation.

WHEREAS, Over the last 30 years, California has experienced 1,451 earthquakes of magnitude 4.0 or greater, ranging from 16 to 168 per year; and

WHEREAS, Most Californians live within 20 miles of a major earthquake fault capable of producing damaging earthquakes; and

WHEREAS, On the morning of August 24, 2014, many residents of Napa discovered they lived closer to such a fault than they believed. A magnitude 6.0 earthquake struck American Canyon, south of Napa, at 3:20 a.m., leading to one death and many injuries. The earthquake seriously damaged nearly 100 homes, as well as many historic downtown buildings. It cost local wineries millions of dollars in spilled wine and damaged equipment, and numerous people were injured. The overall damage and effects of the earthquake demonstrated how even a moderate-sized earthquake can have a large impact on a community; and

WHEREAS, In June 2014, the Los Angeles Times reported that the first five months of the year were marked by five earthquakes larger than magnitude 4.0, after what had been a relatively quiet period of seismic activity for the Los Angeles area. That number of earthquakes at that magnitude had not occurred in a year since 1994, the year of the Northridge earthquake; and

WHEREAS, Faced with the certainty of its peril from earthquakes, over the last three decades California has repeatedly shown that smart public policy choices can help Californians prepare for a catastrophic earthquake. Milestone innovations across this era include the following:

(a)In the year following the 1983 Coalinga earthquake, California passed the Earthquake Insurance Act, requiring residential property insurers to offer homeowners earthquake coverage, to ensure homeowners considered the possibility of protecting their home from earthquake damage.

(b)In the year after the 1989 Loma Prieta earthquake, California began examining how a state-based financial pool might be constructed to improve protection for homeowners. This effort, the California Residential Earthquake Recovery Fund (CRERF), was intended to cover the cost of earthquake insurance deductibles. While this plan was repealed in 1992 as potentially actuarially unsound, it pointed the way to further innovations.

(c)Since 1996, the multipart funding mechanism of the California Earthquake Authority (CEA), a public instrumentality of the State of California, has succeeded as the primary source of earthquake insurance for California homeowners seeking to protect their homes from earthquakes; and

WHEREAS, Despite the growing successes of the CEA since its 1996 formation, how it can be improved has become clear. Almost every news story about California earthquake insurance and the CEA notes that residential earthquake insurance is costly for homeowners and the deductibles are high. The high cost and high deductibles are seen as a key factor behind why only 12 percent of Californians who buy homeowners insurance also buy earthquake insurance; and

WHEREAS, There is no better way to prepare California for the inevitability of disastrous earthquakes than to make earthquake insurance work better for its residents. The limitations of the existing system are well-known. Now is the time for the next key step in policy innovation to make the states earthquake insurance system work better for renters and homeowners; and

WHEREAS, As the CEA approaches two decades of operation, it has become clear that the CEA has pushed the envelope on how a single state-based pool can materially assist in catastrophe readiness. But by law, the CEAs rates must be actuarially sound and based on the best available scientific information for assessing earthquake frequency, severity, and loss; these sensible conditions also temper the CEAs ability to cut the cost of earthquake insurance; and

WHEREAS, As a public instrumentality of the state, the CEA must cover all its risks, including the possibility that at any time, a truly catastrophic earthquake might hit the state; and

WHEREAS, The CEAs need, as a stand-alone, risk-bearing public instrumentality of the state, to always have a plan to cover the chance of a catastrophic earthquake is what, under the current system, keeps the price of earthquake insurance high. For the level of total exposure the policies represent, the rates yield sufficient premiums to pay for a backstop of reinsurance sufficient to offset expected CEA losses in all but the most catastrophic earthquake; and

WHEREAS, A federal policy of certain access to federal debt guarantees for postevent financing would strengthen the risk-bearing capacity of actuarially sound state-based disaster programs like the CEA and reduce the preevent expense of providing that insurance. In recent sessions of the United States Congress, a proposed federal partnership limited to prequalified, actuarially sound state earthquake insurance programs has been estimated to expose the federal government to a 10-year cost of only $25 million; and

WHEREAS, A state and federal partnership to enhance the ability of prequalified, actuarially sound state earthquake funds to access postdisaster borrowing would enable California and other states using actuarially sound programs to manage risk with a dramatically better tool; and

WHEREAS, The CEAs certain access to a federal guarantee of its postearthquake borrowing would ensure access to the private capital markets at reasonable rates, enhancing the claims-paying capacity for a catastrophic earthquake. That lower-cost capacity, in turn, would permit the CEA to adjust its annual purchase of earthquake reinsurance and lower expenses, thus speeding long-term capital accumulation to help CEA modulate its cost of providing basic earthquake insurance across the state; now, therefore, be it

Resolved by the Assembly and the Senate of the State of California, jointly, That the Legislature urges the President and the Congress of the United States to enact legislation to establish guarantees by the federal government to support the responsible sale of postearthquake bonds by financially sound residential-earthquake-insurance programs operated by any of the several states on an actuarially sound basis; and be it further

Resolved, That the Chief Clerk of the Assembly transmit copies of this resolution to the President and Vice President of the United States, to the Speaker of the House of Representatives, to the Majority Leader of the Senate, and to each Senator and Representative from the State of California in the Congress of the United States.

WHEREAS, Over the last 30 years, California has experienced 1,451 earthquakes of magnitude 4.0 or greater, ranging from 16 to 168 per year; and

WHEREAS, Most Californians live within 20 miles of a major earthquake fault capable of producing damaging earthquakes; and

WHEREAS, On the morning of August 24, 2014, many residents of Napa discovered they lived closer to such a fault than they believed. A magnitude 6.0 earthquake struck American Canyon, south of Napa, at 3:20 a.m., leading to one death and many injuries. The earthquake seriously damaged nearly 100 homes, as well as many historic downtown buildings. It cost local wineries millions of dollars in spilled wine and damaged equipment, and numerous people were injured. The overall damage and effects of the earthquake demonstrated how even a moderate-sized earthquake can have a large impact on a community; and

WHEREAS, In June 2014, the Los Angeles Times reported that the first five months of the year were marked by five earthquakes larger than magnitude 4.0, after what had been a relatively quiet period of seismic activity for the Los Angeles area. That number of earthquakes at that magnitude had not occurred in a year since 1994, the year of the Northridge earthquake; and

WHEREAS, Faced with the certainty of its peril from earthquakes, over the last three decades California has repeatedly shown that smart public policy choices can help Californians prepare for a catastrophic earthquake. Milestone innovations across this era include the following:

(a)In the year following the 1983 Coalinga earthquake, California passed the Earthquake Insurance Act, requiring residential property insurers to offer homeowners earthquake coverage, to ensure homeowners considered the possibility of protecting their home from earthquake damage.

(b)In the year after the 1989 Loma Prieta earthquake, California began examining how a state-based financial pool might be constructed to improve protection for homeowners. This effort, the California Residential Earthquake Recovery Fund (CRERF), was intended to cover the cost of earthquake insurance deductibles. While this plan was repealed in 1992 as potentially actuarially unsound, it pointed the way to further innovations.

(c)Since 1996, the multipart funding mechanism of the California Earthquake Authority (CEA), a public instrumentality of the State of California, has succeeded as the primary source of earthquake insurance for California homeowners seeking to protect their homes from earthquakes; and

WHEREAS, Despite the growing successes of the CEA since its 1996 formation, how it can be improved has become clear. Almost every news story about California earthquake insurance and the CEA notes that residential earthquake insurance is costly for homeowners and the deductibles are high. The high cost and high deductibles are seen as a key factor behind why only 12 percent of Californians who buy homeowners insurance also buy earthquake insurance; and

WHEREAS, There is no better way to prepare California for the inevitability of disastrous earthquakes than to make earthquake insurance work better for its residents. The limitations of the existing system are well-known. Now is the time for the next key step in policy innovation to make the states earthquake insurance system work better for renters and homeowners; and

WHEREAS, As the CEA approaches two decades of operation, it has become clear that the CEA has pushed the envelope on how a single state-based pool can materially assist in catastrophe readiness. But by law, the CEAs rates must be actuarially sound and based on the best available scientific information for assessing earthquake frequency, severity, and loss; these sensible conditions also temper the CEAs ability to cut the cost of earthquake insurance; and

WHEREAS, As a public instrumentality of the state, the CEA must cover all its risks, including the possibility that at any time, a truly catastrophic earthquake might hit the state; and

WHEREAS, The CEAs need, as a stand-alone, risk-bearing public instrumentality of the state, to always have a plan to cover the chance of a catastrophic earthquake is what, under the current system, keeps the price of earthquake insurance high. For the level of total exposure the policies represent, the rates yield sufficient premiums to pay for a backstop of reinsurance sufficient to offset expected CEA losses in all but the most catastrophic earthquake; and

WHEREAS, A federal policy of certain access to federal debt guarantees for postevent financing would strengthen the risk-bearing capacity of actuarially sound state-based disaster programs like the CEA and reduce the preevent expense of providing that insurance. In recent sessions of the United States Congress, a proposed federal partnership limited to prequalified, actuarially sound state earthquake insurance programs has been estimated to expose the federal government to a 10-year cost of only $25 million; and

WHEREAS, A state and federal partnership to enhance the ability of prequalified, actuarially sound state earthquake funds to access postdisaster borrowing would enable California and other states using actuarially sound programs to manage risk with a dramatically better tool; and

WHEREAS, The CEAs certain access to a federal guarantee of its postearthquake borrowing would ensure access to the private capital markets at reasonable rates, enhancing the claims-paying capacity for a catastrophic earthquake. That lower-cost capacity, in turn, would permit the CEA to adjust its annual purchase of earthquake reinsurance and lower expenses, thus speeding long-term capital accumulation to help CEA modulate its cost of providing basic earthquake insurance across the state; now, therefore, be it

Resolved by the Assembly and the Senate of the State of California, jointly, That the Legislature urges the President and the Congress of the United States to enact legislation to establish guarantees by the federal government to support the responsible sale of postearthquake bonds by financially sound residential-earthquake-insurance programs operated by any of the several states on an actuarially sound basis; and be it further

Resolved, That the Chief Clerk of the Assembly transmit copies of this resolution to the President and Vice President of the United States, to the Speaker of the House of Representatives, to the Majority Leader of the Senate, and to each Senator and Representative from the State of California in the Congress of the United States.

WHEREAS, Over the last 30 years, California has experienced 1,451 earthquakes of magnitude 4.0 or greater, ranging from 16 to 168 per year; and

WHEREAS, Most Californians live within 20 miles of a major earthquake fault capable of producing damaging earthquakes; and

WHEREAS, On the morning of August 24, 2014, many residents of Napa discovered they lived closer to such a fault than they believed. A magnitude 6.0 earthquake struck American Canyon, south of Napa, at 3:20 a.m., leading to one death and many injuries. The earthquake seriously damaged nearly 100 homes, as well as many historic downtown buildings. It cost local wineries millions of dollars in spilled wine and damaged equipment, and numerous people were injured. The overall damage and effects of the earthquake demonstrated how even a moderate-sized earthquake can have a large impact on a community; and

WHEREAS, In June 2014, the Los Angeles Times reported that the first five months of the year were marked by five earthquakes larger than magnitude 4.0, after what had been a relatively quiet period of seismic activity for the Los Angeles area. That number of earthquakes at that magnitude had not occurred in a year since 1994, the year of the Northridge earthquake; and

WHEREAS, Faced with the certainty of its peril from earthquakes, over the last three decades California has repeatedly shown that smart public policy choices can help Californians prepare for a catastrophic earthquake. Milestone innovations across this era include the following:

(a)In the year following the 1983 Coalinga earthquake, California passed the Earthquake Insurance Act, requiring residential property insurers to offer homeowners earthquake coverage, to ensure homeowners considered the possibility of protecting their home from earthquake damage.

(b)In the year after the 1989 Loma Prieta earthquake, California began examining how a state-based financial pool might be constructed to improve protection for homeowners. This effort, the California Residential Earthquake Recovery Fund (CRERF), was intended to cover the cost of earthquake insurance deductibles. While this plan was repealed in 1992 as potentially actuarially unsound, it pointed the way to further innovations.

(c)Since 1996, the multipart funding mechanism of the California Earthquake Authority (CEA), a public instrumentality of the State of California, has succeeded as the primary source of earthquake insurance for California homeowners seeking to protect their homes from earthquakes; and

WHEREAS, Despite the growing successes of the CEA since its 1996 formation, how it can be improved has become clear. Almost every news story about California earthquake insurance and the CEA notes that residential earthquake insurance is costly for homeowners and the deductibles are high. The high cost and high deductibles are seen as a key factor behind why only 12 percent of Californians who buy homeowners insurance also buy earthquake insurance; and

WHEREAS, There is no better way to prepare California for the inevitability of disastrous earthquakes than to make earthquake insurance work better for its residents. The limitations of the existing system are well-known. Now is the time for the next key step in policy innovation to make the states earthquake insurance system work better for renters and homeowners; and

WHEREAS, As the CEA approaches two decades of operation, it has become clear that the CEA has pushed the envelope on how a single state-based pool can materially assist in catastrophe readiness. But by law, the CEAs rates must be actuarially sound and based on the best available scientific information for assessing earthquake frequency, severity, and loss; these sensible conditions also temper the CEAs ability to cut the cost of earthquake insurance; and

WHEREAS, As a public instrumentality of the state, the CEA must cover all its risks, including the possibility that at any time, a truly catastrophic earthquake might hit the state; and

WHEREAS, The CEAs need, as a stand-alone, risk-bearing public instrumentality of the state, to always have a plan to cover the chance of a catastrophic earthquake is what, under the current system, keeps the price of earthquake insurance high. For the level of total exposure the policies represent, the rates yield sufficient premiums to pay for a backstop of reinsurance sufficient to offset expected CEA losses in all but the most catastrophic earthquake; and

WHEREAS, A federal policy of certain access to federal debt guarantees for postevent financing would strengthen the risk-bearing capacity of actuarially sound state-based disaster programs like the CEA and reduce the preevent expense of providing that insurance. In recent sessions of the United States Congress, a proposed federal partnership limited to prequalified, actuarially sound state earthquake insurance programs has been estimated to expose the federal government to a 10-year cost of only $25 million; and

WHEREAS, A state and federal partnership to enhance the ability of prequalified, actuarially sound state earthquake funds to access postdisaster borrowing would enable California and other states using actuarially sound programs to manage risk with a dramatically better tool; and

WHEREAS, The CEAs certain access to a federal guarantee of its postearthquake borrowing would ensure access to the private capital markets at reasonable rates, enhancing the claims-paying capacity for a catastrophic earthquake. That lower-cost capacity, in turn, would permit the CEA to adjust its annual purchase of earthquake reinsurance and lower expenses, thus speeding long-term capital accumulation to help CEA modulate its cost of providing basic earthquake insurance across the state; now, therefore, be it

Resolved by the Assembly and the Senate of the State of California, jointly, That the Legislature urges the President and the Congress of the United States to enact legislation to establish guarantees by the federal government to support the responsible sale of postearthquake bonds by financially sound residential-earthquake-insurance programs operated by any of the several states on an actuarially sound basis; and be it further

Resolved, That the Chief Clerk of the Assembly transmit copies of this resolution to the President and Vice President of the United States, to the Speaker of the House of Representatives, to the Majority Leader of the Senate, and to each Senator and Representative from the State of California in the Congress of the United States.

 THIRD READING  

Bill No: AJR 6

Author: Cooley (D)

Introduced: 2/24/15

Vote: 21

SENATE INSURANCE COMMITTEE: 9-0, 6/10/15

AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez, Liu, Mitchell, Wieckowski

ASSEMBLY FLOOR: 79-0, 4/13/15 - See last page for vote

SUBJECT: California Earthquake Authority: postearthquake financing

SOURCE: Author

DIGEST: This bill recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the California Earthquake Authority (CEA), and urges the President of the United States and the Congress of the United States to enact such legislation.

ANALYSIS:

Existing law:

1. Provides that no homeowners’ insurance policy may be offered or sold in California unless the homeowner is offered earthquake coverage, either as part of the homeowners’ policy, or as a separate policy.

2. Establishes the CEA, a privately financed, publicly managed entity to sell only earthquake insurance.

3. Allows the CEA to purchase reinsurance and issue bonds to expand its capacity to write earthquake insurance coverage.

4. Requires insurers participating in the CEA to provide limited additional funding to pay claims in the event all available capital and reinsurance is exhausted, as specified.

5. Authorizes the State Treasurer, in the event the CEA has exhausted its capital resources available to pay claims, to issue up to $1 billion in revenue bonds or other debt financing that would be repaid through a post-event surcharge imposed on CEA policyholders up to an additional 20% of their annual premium.

This bill:

1. Makes various legislative findings regarding the peril posed by earthquakes in California, and the need for smart policy choices to make earthquake insurance work better for its residents.

2. Recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the CEA, and urges the President of the United States and the Congress of the United States to enact such legislation.
   
   

Background

Insurance is the primary mechanism to spread losses and recover from catastrophes such as earthquakes. Nonetheless, according to data from the California Department of Insurance, fewer than 11% of California homeowners and only about 8.3% of businesses have earthquake insurance. Earthquake peril is not covered by homeowners’ or business insurance policies, and must be purchased separately. One of the reasons for the low rates of earthquake insurance is its high cost.

Contributing to that high cost is the need to purchase reinsurance. In 2012, the CEA spent 39% of premiums, totaling $222 million, on reinsurance. According to the CEA, from 1996-2014, the CEA has paid $3.7 billion for reinsurance, but has collected only $250,000 on claims under those policies. Post-event bonding authority would lower the cost of earthquake insurance for homeowners who buy coverage from non-profit, state earthquake insurance programs such as the CEA, and could also direct funding to effective seismic-mitigation measures. It would allow the CEA to sell post-event bonds in the private capital market, reducing the need to purchase reinsurance pre-event and result in rate reductions and lower deductibles.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/11/15)

None received

OPPOSITION: (Verified 6/11/15)

None received

ASSEMBLY FLOOR: 79-0, 4/13/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Harper

Prepared by: Erin Ryan / INS. / (916) 651-4110

6/12/15 11:23:50

**** END ****

 THIRD READING 

Bill No: AJR 6

Author: Cooley (D)

Introduced: 2/24/15

Vote: 21

SENATE INSURANCE COMMITTEE: 9-0, 6/10/15

AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez, Liu, Mitchell, Wieckowski

ASSEMBLY FLOOR: 79-0, 4/13/15 - See last page for vote

SUBJECT: California Earthquake Authority: postearthquake financing

SOURCE: Author

DIGEST: This resolution recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the California Earthquake Authority (CEA), and urges the President of the United States and the Congress of the United States to enact such legislation.

ANALYSIS:

Existing law:

1. Provides that no homeowners’ insurance policy may be offered or sold in California unless the homeowner is offered earthquake coverage, either as part of the homeowners’ policy, or as a separate policy.

2. Establishes the CEA, a privately financed, publicly managed entity to sell only earthquake insurance.

3. Allows the CEA to purchase reinsurance and issue bonds to expand its capacity to write earthquake insurance coverage.

4. Requires insurers participating in the CEA to provide limited additional funding to pay claims in the event all available capital and reinsurance is exhausted, as specified.

5. Authorizes the State Treasurer, in the event the CEA has exhausted its capital resources available to pay claims, to issue up to $1 billion in revenue bonds or other debt financing that would be repaid through a post-event surcharge imposed on CEA policyholders up to an additional 20% of their annual premium.

This resolution:

1. Makes various legislative findings regarding the peril posed by earthquakes in California, and the need for smart policy choices to make earthquake insurance work better for its residents.

2. Recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the CEA, and urges the President of the United States and the Congress of the United States to enact such legislation.
   
   

Background

Insurance is the primary mechanism to spread losses and recover from catastrophes such as earthquakes. Nonetheless, according to data from the California Department of Insurance, fewer than 11% of California homeowners and only about 8.3% of businesses have earthquake insurance. Earthquake peril is not covered by homeowners’ or business insurance policies, and must be purchased separately. One of the reasons for the low rates of earthquake insurance is its high cost.

Contributing to that high cost is the need to purchase reinsurance. In 2012, the CEA spent 39% of premiums, totaling $222 million, on reinsurance. According to the CEA, from 1996-2014, the CEA has paid $3.7 billion for reinsurance, but has collected only $250,000 on claims under those policies. Post-event bonding authority would lower the cost of earthquake insurance for homeowners who buy coverage from non-profit, state earthquake insurance programs such as the CEA, and could also direct funding to effective seismic-mitigation measures. It would allow the CEA to sell post-event bonds in the private capital market, reducing the need to purchase reinsurance pre-event and result in rate reductions and lower deductibles.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/11/15)

None received

OPPOSITION: (Verified 6/11/15)

None received

ASSEMBLY FLOOR: 79-0, 4/13/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Harper

Prepared by: Erin Ryan / INS. / (916) 651-4110

6/12/15 16:30:00

**** END ****

SENATE COMMITTEE ON INSURANCE

Senator Richard Roth, Chair

2015 - 2016 Regular

Bill No: AJR 6 Hearing Date: June 10, 2015

Subject: California Earthquake Authority: postearthquake financing.

SUMMARY

Recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the California Earthquake Authority (CEA), and urges the President of the United States and the Congress of the United States to enact such legislation.

DIGEST

Existing law

1. Provides that no homeowners’ insurance policy may be offered or sold in California unless the homeowner is offered earthquake coverage, either as part of the homeowners’ policy, or as a separate policy.

2. Establishes the CEA, a privately financed, publicly managed entity to sell only earthquake insurance.

3. Allows the CEA to purchase reinsurance and issue bonds to expand its capacity to write earthquake insurance coverage.

4. Requires insurers participating in the CEA to provide limited additional funding to pay claims in the event all available capital and reinsurance is exhausted, as specified.

5. In the event the CEA has exhausted its capital resources available to pay claims, authorizes the Treasurer to issue up to $1 billion in revenue bonds or other debt financing that would be repaid through a post-event surcharge imposed on CEA policyholders up to an additional 20% of their annual premium.

This bill

1. Makes various legislative findings regarding the peril posed by earthquakes in California, and the need for smart policy choices to make earthquake insurance work better for its residents.

2. Recognizes the need for federal legislation that establishes guarantees of post-earthquake financing for pre-qualified, actuarially sound state earthquake programs, including the CEA, and urges the President of the United States and the Congress of the United States to enact such legislation.
   
   

COMMENTS

1. Purpose of the bill To urge the federal government to enact legislation establishing federal guarantees for post-earthquake financing bonds, allowing the CEA to reduce its purchase of reinsurance, allowing it to reduce earthquake insurance premiums while remaining actuarially sound.
   
   

2. Background Insurance is the primary mechanism to spread losses and recover from catastrophes such as earthquakes. Nonetheless, according to data from the California Department of Insurance, fewer than 11% of California homeowners and only about 8.3 percent businesses have earthquake insurance. Earthquake peril is not covered by homeowners’ or business insurance policies, and must be purchased separately. One of the reasons for the low rates of earthquake insurance is its high cost.

Contributing to that high cost is the need to purchase reinsurance. In 2012, the CEA spent 39% of premiums, totaling $222 million, on reinsurance. According to the CEA, from 1996-2014, the CEA has paid $3.7 billion for reinsurance, but has collected only $250,000 on claims under those policies. Post-event bonding authority would lower the cost of earthquake insurance for homeowners who buy coverage from non-profit, state earthquake insurance programs, and could also direct funding to effective seismic-mitigation measures. It would allow the CEA to sell post-event bonds in the private capital market, reducing the need to purchase reinsurance pre-event and result in rate reductions and lower deductibles.

3. Support According to the author, as a stand-alone, risk bearing public instrumentality of the state, the CEA needs to always have a plan to cover the chance of a catastrophic earthquake. This need and the requirement that the Authority remain actuarially sound is what, under the current system, keeps the price of earthquake insurance so high. To ensure that it is actuarially sound, the CEA must maintain a backstop of reinsurance sufficient to offset expected losses from catastrophic earthquakes. The CEA uses the payment of insurance premiums by policyholders to make their own payments for reinsurance. A federal policy that provides access to debt guarantees for post-event financing would strengthen the risk bearing capacity to state based disaster programs like the CEA and reduce the expense of providing pre-event insurance.

4. Opposition None received.
   
   

5. Prior and Related Legislation SJR 28 (Monning Chapter 92, 2014) memorialized the President of the United States and the Congress of the United States to enact the Earthquake Insurance Affordability Act (S. 1813 Feinstein/Boxer), which would provide a federal guarantee allowing the CEA to sell lower cost post-event bonds in the private capital market, reduce the need to purchase reinsurance pre-event and result in rate reductions and lower deductibles.
   
   

POSITIONS

Support

None received

Oppose

None received

-- END --

Date of Hearing: April 8, 2015

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AJR 6

Author:(Cooley) – As Introduced Ver:February 24, 2015

SUBJECT: California Earthquake Authority: postearthquake financing

SUMMARY: Urges the creation of a federal guarantee for post-earthquake borrowing by the California Earthquake Authority (CEA). Specifically, this bill:

1. Contains declarations regarding the earthquake risks faced by Californians.

2. Contains declarations regarding California's policy innovations in response to prior earthquakes.

3. Contains declarations regarding the success of the CEA in making earthquake insurance available to homeowners.

4. Details how a federal guarantee of post-earthquake borrowing by the CEA would lower the cost of earthquake insurance.

5. Resolves that the U.S. Congress should pass, and the President should sign, legislation creating a federal guarantee for post-earthquake borrowing by a state operated earthquake insurance program.

6. Resolves that the Clerk of the Assembly deliver a copy of the resolution to the President, Vice-President, Speaker of the House of Representatives, the Majority Leader of the Senate, and to each Member of the California House and Senate delegations.

EXISTING LAW:

1. Establishes the CEA as a publicly managed insurer to provide earthquake insurance.

2. Requires that individuals purchasing a homeowner's insurance policy be offered an earthquake insurance policy that meets minimum requirements.

3. Permits the CEA to purchase reinsurance.

4. Permits the CEA to issue bonds.

5. Required participating property insurers to provide the initial operating capital to the CEA.

6. Requires insurers participating in the CEA to provide additional funding if the CEA has claim payment obligations exceeding its ability to pay.

FISCAL EFFECT: Undetermined.

COMMENTS:

1. Purpose. According to the author, as a stand-alone, risk-bearing public instrumentality of the state the CEA needs to always have a plan to cover the chance of a catastrophic earthquake. This need and the requirement that the Authority remain actuarially sound is what, under the current system, keeps the price of earthquake insurance so high. To ensure that it is actuarially sound, the CEA must maintain a backstop of reinsurance sufficient to offset expected losses from catastrophic earthquakes. The CEA uses the payment of insurance premiums by their policyholders to make their own payments on the reinsurance. A federal policy that provides certain access to debt guarantees for post-event financing would strengthen the risk-bearing capacity of state-based disaster programs like the CEA and reduce the expense of providing pre-event insurance.

2. California Earthquake Authority. The CEA was formed through legislation in 1995 and 1996 to address an insurance-availability crisis that followed the 1994 Northridge earthquake. After that earthquake, many homeowners found it difficult or impossible to find basic homeowner's insurance. Many others were faced with the prospect of having their homeowners' insurance non-renewed as insurance companies tried to shed their exposure to earthquake risk. Because state law requires insurers to offer earthquake insurance to their applicants and holders of residential policies, the insurers’ retreat from the California market resulted in an availability crisis for both homeowners and earthquake insurance. The California Department of Insurance reported in the summer of 1996, at the height of the crisis, that 95 percent of the homeowners' insurance market had either stopped, or severely restricted, sales of new homeowners' policies.

After the CEA began operations in December 1996, the California homeowners' insurance market recovered quickly. A Department of Insurance report noted that at the peak of the availability crisis, 82 insurers had restricted the sale of new homeowners' insurance policies. By October 1997, only three insurers were restricting the sale of new policies. Since that time, the requirement to offer earthquake insurance has not been a factor in restricting the availability of homeowners' insurance.

3. Post-Earthquake Borrowing. California Senators Dianne Feinstein and Barbara Boxer have introduced the Earthquake Insurance Affordability Act that would authorize a federal guarantee of limited post-earthquake borrowing by actuarially sound state residential earthquake insurance programs. Under the proposal, the CEA would be able to sell post-event bonds in the private capital market. This would reduce the need to purchase reinsurance pre-event, allowing them to reduce rates and lower deductibles. With more people insured, post event disaster assistance would cost less to the state and federal government, and communities could recover more quickly. The CEA contends that a federal guarantee for loans would be a cheaper way to finance claims payments. A Congressional Budget Office analysis of a similar bill introduced in 2007 estimated that the cost to the federal government associated with loan guarantees and post-disaster loans would be negligible.

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Analysis Prepared by: Paul Riches / INS. / (916) 319-2086