BILL ANALYSIS
SENATE RULES COMMITTEE AB 1754
Office of Senate Floor Analyses
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THIRD READING
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Bill No: AB 1754
Author: Knowles (R)
Amended: 8/19/96 in Senate
Vote: 21
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SENATE INSURANCE COMMITTEE: 6-1, 7/3/96
AYES: Lewis, Johnson, Johnston, O'Connell, Peace, Russell
NOES: Rosenthal
NOT VOTING: Hughes, Killea
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 41-28, 1/30/96 - See last page for vote
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SUBJECT: Insurance: Fair Plan
SOURCE: The author
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DIGEST: This bill:
1. Provides that a policy of residential property
insurance that does not include any of the perils insured
in a standard fire policy is not to be included in the
definition of policy of residential property insurance.
2. Prohibits rates for the Fair Plan from being excessive,
inadequate, or unfairly discriminatory. The rates are to
be actuarially sound so that premiums are adequate to
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cover expected losses, expenses and taxes, and are to
reflect investment income of the plan. Specify the
factors that the Fair Plan is to consider in adopting
rates.
ANALYSIS: Existing law
1. Establishes the California Fair Plan Association,
comprised of all insurers in California that write
property insurance business, and designed to provide
basic property insurance to California property owners
unable to procure insurance through normal market
channels.
2. Provides for financing of the Fair Plan, first through
premiums collected in the current year, and if there is a
shortfall, through assessments on member insurers. Where
there is a surplus in a particular year, which is
usually the case, the surplus is paid out to member
insurers.
3. Authorizes but does not require the Fair Plan to offer
earthquake coverage along with basic property insurance.
4. Proposition 103 requires that insurance rates not be
excessive, inadequate or unfairly discriminatory.
5. Requires that a "policy of residential property
insurance" may not be issued or renewed by any insurer
unless the insured is "offered" coverage for earthquake
loss or damage.
This bill requires that the rates for a policy of
earthquake property insurance issued by the Fair Plan shall
be established based on the best available scientific
information for assessing the risk of earthquake loss.
Specifies factors that must be considered in setting such
rates, and the Fair Plan Association may not adjust rates
lower than justified in high-risk classifications or higher
than justified in low-risk classifications.
AB 1754:
1. Prohibits rates for the Fair Plan from being excessive,
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inadequate, or unfairly discriminating. Requires the
rates to be actuarially sound so that premiums are
adequate to cover expected losses, expenses and taxes,
and requires the rates to reflect investment income of
the plan. If the plan returns premiums to members
annually, the rates are not to include any component
relating to surplus enhancements.
2. Requires that rates for a policy of earthquake
insurance issued by the Fair Plan is to be established
based on the best available scientific information for
assessing the risk of earthquake. Factors that the
association is to consider in adopting the rates would
include, but are not limited to, the following:
A. Location of the insured property and its proximity
to earthquake faults and to other geological factors
affecting the risk of earthquake.
B. The soil type upon which the insured dwelling is
built.
C. Construction type of the insured dwelling.
D. The presence of earthquake hazard reduction
factors as defined in law.
3. Specifies that all information considered by the Fair
Plan Association in establishing rates are to be public
records.
4. Prohibits the Fair Plan Association from adjusting
rates lower than justified in high-risk classifications
or higher than justified in low-risk classifications.
5. Provides that a policy of residential property
insurance that does not include any of the perils insured
against in a standard fire policy is not to be included
in the definition of policy of residential property
insurance.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
Local: No
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SUPPORT: (Verified 8/19/96)
Association of California Insurance Companies
California Association of Health Underwriters
Mercury Insurance Group
National Association of Independent Insurers
Personal Insurance Federation of California
State Farm Insurance Companies
OPPOSITION: (Unable to reverify opposition at time of
this writing)
Proposition 103 Enforcement Project
ARGUMENTS IN SUPPORT: The author believes that the rates
currently charged by the Fair Plan are not actuarially
sound and that these unsound rates have resulted in the
inability of the Fair Plan to cover losses on its policies.
The author believes that this bill is necessary to protect
the solvency of the Fair Plan by making Fair Plan rates
actuarially sound. The author believes that higher rates
will discourage use of the Fair Plan and thus reduce risk.
As of January 10, 1996 the Fair Plan had 45,282 earthquake
policies in force with a total exposure of over $11.3
billion. This represents about two percent of market share,
which is double the market share from one year ago.
Because there is presently no cap on Fair Plan market
share, the potential assessments against companies are
uncontrollable. The only way for a company to reduce its
assessment is to reduce its market share by non renewing
policies. The author believes that the negative effects of
uncontrollable Fair Plan exposure on the state's homeowners
and commercial property insurance market is further
exacerbated by providing a disincentive for new companies
to enter the California market.
ASSEMBLY FLOOR:
AYES: Ackerman, Aguiar, Alby, Baldwin, Battin, Baugh,
Boland, Bordonaro, Bowler, Brewer, Brulte, Conroy,
Cunneen, Firestone, Frusetta, Goldsmith, Granlund,
Harvey, Hawkins, Hoge, House, Kaloogian, Knight, Knowles,
Kuykendall, Margett, McPherson, Miller, Morrissey,
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Morrow, Olberg, Poochigian, Rainey, Richter, Rogan,
Setencich, Takasugi, Thompson, Weggeland, Woods, Pringle
NOES: Archie-Hudson, Baca, Brown, Burton, Bustamante,
Caldera, Cannella, Escutia, Figueroa, Friedman, Gallegos,
Hauser, Isenberg, Katz, Knox, Kuehl, Lee, Machado,
Martinez, Mazzoni, K. Murray, W. Murray, Napolitano,
Sher, Speier, Sweeney, Tucker, Villaraigosa
NOT VOTING: Alpert, Bates, Bowen, Campbell, Cortese,
Davis, Ducheny, Hannigan, McDonald, Vasconcellos
DLW:jk 8/20/96 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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