BILL ANALYSIS                                                                                                                                                                                                    Ó



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          CONCURRENCE IN SENATE AMENDMENTS
          AB 2064 (Cooley)
          As Amended  August 11, 2014
          Majority vote
           
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          |ASSEMBLY:  |78-0 |(May 15, 2014)  |SENATE: |35-0 |(August 14,    |
          |           |     |                |        |     |2014)          |
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           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.









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          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  








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            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  








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            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


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