BILL ANALYSIS Ó AB 2064 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 2064 (Cooley) As Amended August 11, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |78-0 |(May 15, 2014) |SENATE: |35-0 |(August 14, | | | | | | |2014) | ----------------------------------------------------------------- Original Committee Reference: INS. SUMMARY : Updates existing statutory notice requirements related to earthquake insurance and clarifies existing statutory limits on spending by the California Earthquake Authority (CEA). The Senate amendments : 1)Delay implementation of this bill until January 1, 2016. 2)Clarify and simplify the earthquake insurance notice. 3)Increase the cap on CEA operating expenses to 6% effective January 1, 2015. 4)Require that participating insurers provide policy holders who have not purchased earthquake insurance with marketing materials produced by the CEA at least once every year. 5)Resolve chaptering out conflicts with AB 2735 (Insurance Committee) of the current legislative session. EXISTING LAW : 1)Requires that individuals purchasing a homeowner's insurance policy be offered an earthquake insurance policy that meets minimum requirements. 2)Establishes the CEA as a publicly managed insurer to provide earthquake insurance. 3)Requires that homeowners be notified of their right to purchase earthquake insurance upon the issuance of a homeowner's insurance policy. AB 2064 Page 2 4)Requires that holders of a homeowner's insurance policy who do not have earthquake insurance be notified of their right to purchase earthquake insurance at least every other year. 5)Requires that the notice begin with the following sentence: "YOUR POLICY DOES NOT PROVIDE COVERAGE AGAINST THE PERIL OF EARTHQUAKE." AS PASSED BY THE ASSEMBLY , this bill: 1)Revised the earthquake insurance notice, including an offer to purchase earthquake insurance, that is required to be provided when a residential property insurance policy is purchased. 2)Increased the cap on CEA operating expenses to 5% of premiums collected. 3)Defined the term "operating expenses" for the CEA budget. 4)Clarified that CEA policies become effective upon receipt by the participating insurer of a signed application and premium payment. 5)Required participating insurers to provide policy holders who have not purchased earthquake insurance with information regarding the availability and cost of earthquake insurance when they issue or renew a policy of residential property insurance. 6)Delayed implementation of the bill until July 1, 2015. FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS : 1)Purpose. According to the author, homeowners have the right to purchase earthquake insurance but very few Californians take advantage of that right. The current law requires insurers to make the offer of earthquake insurance in a form that is written at a twelfth grade reading level, uses insurance industry jargon, and intimidates many consumers. An updated offer that is written in a more consumer-friendly fashion may encourage more consumers to buy earthquake insurance. In addition, existing statute limiting CEA operating expenses is unclear and is preventing the CEA from AB 2064 Page 3 being more effective in reaching out to Californians who don't have earthquake 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% 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)Notice. Existing law requires insurers to provide consumers with a notice of their right to purchase (including details regarding the coverage and premium offered) earthquake insurance and the text of that notice is specified in statute. The required text of this notice is littered with insurance jargon and is unlikely to be useful to all but the most determined or informed consumer. This bill revises that notice dramatically and replaces much of the insurance jargon with language more likely to be understood by the average consumer. This notice is central to the earthquake insurance market and it is likely that the revised notice will be subject to ongoing revision as the bill progresses through the legislative process. 4)Take Up Rate. In 1996 (the year the CEA began operating) over AB 2064 Page 4 there were over two million policyholders with earthquake insurance. That number shrank to just over 1 million policies in 2012. The CEA reports that it issues three-quarters of the earthquake policies in California and is the largest earthquake insurer in the United States with approximately 840,000 policies in place today. 5)Operating Expenses. Existing law caps the "operating expenses" of the CEA at 3% of the premium collected by the CEA. This cap was established based on an expectation that the take-up rate for earthquake insurance would be approximately 30% instead of the approximately 9% experienced in recent years. As a result, the CEA has a lower cap figure than expected and that lower cap figure has created budgetary pressure. In response to that pressure the CEA made a number of adjustments to how it classifies expenses to create space under the cap. This bill increases the cap to 6% of premium collected to reflect the lower take-up rate and free the CEA from the need to engage in budgetary maneuvers to stay under the 3% cap. The bill also defines "operating expenses" to provide the CEA with clearer guidance regarding the cap on operating expenses. These changes should relieve the pressure that has driven the reclassification of expenses in previous budgets. 6)Related Legislation. The Assembly Insurance Committee passed AB 2735 this year that clarifies existing requirements to provide homeowners with notices of their right to purchase earthquake insurance. Analysis Prepared by : Paul Riches / INS. / (916) 319-2086 FN: 0004708