California Legislature—2015–16 Regular Session

Assembly Joint Resolution No. 6

Introduced by Assembly Member Cooley

February 24, 2015

Assembly Joint Resolution No. 6—Relative to earthquake insurance.

LEGISLATIVE COUNSEL’S DIGEST

AJR 6, as introduced, Cooley. California Earthquake Authority: postearthquake financing.

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.

Fiscal committee: no.

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 state’s 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 CEA’s 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 CEA’s 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 CEA’s 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 CEA’s 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.