BILL ANALYSIS Ó
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Date of Hearing: April 8, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
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(Cooley) - As Introduced 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.
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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
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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
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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
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guarantees and post-disaster loans would be negligible.
REGISTERED SUPPORT / OPPOSITION:
Support
None received
Opposition
None received
Analysis Prepared by:Paul Riches / INS. / (916) 319-2086
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