BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AJR 6 Hearing Date: June 10,
2015
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|Author: |Cooley |
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|Version: |February 24, 2015 Introduced |
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|Urgency: | |Fiscal: |No |
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|Consultant:|Erin Ryan |
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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.
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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,
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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
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None received
Oppose
None received
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