BILL ANALYSIS
CONFERENCE REPORT COMMITTEE ANALYSIS
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Bill No: AB 2086
Author: Knowles
RN: 9622994
Report date:July 7
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SUBJECT: Earthquake Insurance
Were the Conference amendments heard (*) in committee?
yes
If yes, were they defeated? no
SUMMARY: SB 1993 and AB 2086, which are "double-joined,"
and which contain separate but interdependent parts of a
single Conference Committee product, would provide
Legislative authorization for a California Earthquake
Authority (CEA) to become operational and offer earthquake
insurance.
DIGEST:
Existing law
1."Mandates" insurers which sell homeowners insurance to
"offer" policyholders the option of purchasing
"earthquake insurance," which is otherwise excluded from
the homeowners policy. This requirement applies to
policies sold to owners of single family residences,
mobile homes, and individual condominium units.
2.Eliminates, in the context of earthquake insurance only,
the doctrine of "concurrent causation" (which requires
insurers to pay claims caused by multiple causes where at
least one cause is covered even though another cause
[e.g., earthquake] is excluded from the policy).
3.Provides for the California "FAIR Plan" to issue "basic
property insurance" to property owners who are unable to
purchase insurance through voluntary market mechanisms.
4.Allows insurers to comply with the "mandate to offer"
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earthquake insurance (see #1) by selling a "no-frills"
policy which covers only the basic structure, with modest
contents and living expenses allowances.
5.Provides for a California Insurance Guarantee Association
(CIGA) which guarantees payment of policyholder "covered
claims" (which includes homeowners insurance claims up to
$500,000) if their insurance company has become
insolvent.
6.Conditionally establishes a California Earthquake
Authority (CEA), which would be a publicly-run earthquake
insurance company. However, pursuant to AB 13 (the bill
enacted last year which adopted the CEA blueprint) the
CEA cannot issue policies unless the Legislature passes
an authorization bill.
7.Authorizes the Insurance Commissioner to seek to
establish the CEA, and to return to the Legislature to
seek authorization to commence issuance of insurance
policies by the CEA once specified conditions are met.
The conditions include obtaining:
(a) commitments from 75% of the insurer market
(b) commitments from reinsurers for up to $2 billion
(c) IRS approval of tax-exempt status
The Proposed Conference Reports (treated here as a single
proposal):
1.Authorize the CEA to issue policies once the Insurance
Commissioner has certified that:
(a) insurers representing 70% of the market have
committed to participate
(b) reinsurance has been obtained in an amount at least
equal to 200% of the capital contributions committed by
insurers which elect to participate
(c) the IRS has ruled the plan to be tax-exempt;
2.Make numerous substantive and technical changes to the
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structure of the CEA as contained in AB 13. The more
significant changes include:
a) A reduction (from 75% to 70% of the homeowners market)
of the number of insurers which must choose to participate
in the CEA in order for the program to commence.
b) A limitation on renewing debt which is re-paid by
policyholder surcharges. AB 13 would allow debt up to $1
billion, but would allow additional assessments in the
future if part of the $1 billion were retired. The total
aggregate amount would be limited for all time to $1
billion under this proposal. If insurers representing less
than 100% of the market elect to participate, the $1
billion is reduced proportionately to reflect the smaller
percentage of participating insurers.
c) An increase, from $200 million to $350 million in
funds, below which the CEA must call in contingent capital
owed by insurers to pay claims and to restore the available
capital of the CEA to the $350 million threshold.
d) The addition of condominium "loss assessment" coverage
as part of the policies that the CEA may offer, and the
potential increase (depending on fund growth), from $1500
to up to $3000, of coverage for additional living expenses.
e) A shift, from the Insurance Commissioner to the
Governor, of the power to appoint most members of the CEA's
"advisory panel."
f) An extension of insurers' contingent capital
obligation, allowing for possible collection for up to 12
years (as compared to 10 years under AB 13). In addition,
instead of "rolling off" upon specified buildup of CEA
funds, the assessment liability would "roll up" to the top
of the CEA financial structure. [Note: Amendments to this
Conference Report contained in AB 3232 may change this
"roll up" provision.]
g) Repeal of the provision which declares the CEA to be
an insurer for purposes of the Insurance Code, and addition
of general language indicating that the CEA must abide by
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the statutes, regulations, and common law rules which apply
to insurers when dealing with applicants and policyholders.
In addition, the CEA would be liable for "bad faith"
actions in the same manner as an insurer is liable for its
"bad faith" actions.
h) Clarifying language to the effect that the basic
procedures of Proposition 103 will apply to ratemaking and
rule making functions of the CEA.
i) Language which narrows the scope of AB 13's broad
conflict of interest provisions so that regular CEA
employees do not experience bars to future employment with
employers who contract with the CEA.
j) Additional language deemed by the Treasurer to be
commercially necessary in order to successfully market
earthquake risk bonds to capital market purchasers, as
contemplated by the CEA's plan to obtain $1.5 billion of
capital market capacity.
k) Additional language which renders specified revenue of
the CEA dedicated to repayment of debt incurred to finance
the $1 billion policyholder assessment layer.
l) Preferences for so-called "small insurers." The
preferences are two-fold: 1) any insurer (regardless of
size) with less than 1.25% market share, or with less than
$1 billion of surplus, may join the CEA with a 5-year
installment plan for its initial buy-in price; 2) upon
specified findings by the CEA Board concerning the status
of the market after 1 year of CEA operations, any insurer
could become an "associate" participating insurer and place
new business only into the CEA. Among various conditions
related to "associate" status, the Board is empowered to
offer "incentives" to induce participation, and these
incentives need not be available to all insurers.
m) A requirement that any insurer which leaves the CEA
after policyholder surcharges have been imposed must
surcharge its earthquake policyholders an amount equal to
what would have been paid had the insurer remained a
participating insurer.
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n) The addition of a CEA-specific warning notice to all
prospective policyholders. The notice warns of the
potential for surcharges, pro-rata payments, and the lack
of CIGA protection.
o) Changing the potential surcharge for repayment of the
policyholder assessment layer of financing from a surcharge
on the policyholder to a surcharge on the CEA policy.
Key differences between the Proposed Conference Reports,
and SB 1993, the CEA bill passed by the Senate:
1. Policyholder assessment layer returned to greater risk
AB 13 level. AB 13 placed CEA policyholders at risk for
"surcharges" in the event losses exceeded available
capital, specified contingent capital obligations, and
reinsurance. This risk was lower than capital market
investors and other specified insurer contingent capital
obligations. AB 2086, and SB 1993 at the request of
Senator Lockyer, placed policyholders at risk only after
all other sources of funding would be exhausted. This
proposal returns the surcharge risk to policyholders to the
AB 13 greater risk level.
2. Insurer contingent capital obligations can still
"run-off" without actual reserves to backfill the loss of
capacity. AB 13 provides that, subject to a specified
formula, the $3 billion (lower) layer of insurer contingent
capital goes away after 10 years, even if there are no
funds to fill in the gap. SB 1993, at the request of
Senator Johnston, required that the full insurer obligation
remain for 10 years, and then it could "run-off" only if
there was actual cash reserves to make up for the loss of
capacity. This proposal retains a modified AB 13 formula.
Subject to the AB 13 "roll off" formula, instead of having
the contingent obligation eliminated if funds accumulate,
it "rolls up" to the top of the financing structure. Once
on top, it becomes an obligation of last resort and the
obligation is entirely eliminated, whether or not there is
any cash reserves to backfill the loss, at the 12-year
mark.
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3. " Homeowner" policies cancelable to enforce
policyholder surcharge. If a policyholder surcharge is
imposed, AB 13 enforced collection of the surcharge by
providing in theory for cancellation of both the earthquake
and the underlying homeowners policy in the event the
policyholder failed to pay the surcharge. The policyholder
would have had to attempt to buy both coverages, but delete
from the premium payment an amount equal to the portion of
the earthquake premium attributable to the surcharge. SB
1993, at the request of Senator Peace, eliminated the
potential that the underlying homeowners policy could be
canceled. This proposal deletes the SB 1993 language, but
clarifies that the policyholder can avoid paying the
surcharge by declining to continue to purchase the CEA
earthquake policy. (Note: AB 3232, which would amend this
Conference Report, provides for additional disclosure
language to ensure that policyholders are aware of their
options in the event a surcharge is imposed.)
4. "Recapitalization threshold" increased. As noted in
paragraph (c), above, this Conference Report increases the
level at which CEA funds would be replenished by insurers'
contingent capital being actually contributed. This
provision increases the likelihood that the "contingent"
liability will actually be paid.
By: Insurance Committee; Mark Rakich
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SENATE RULES COMMITTEE AB 2086
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 445-6614 Fax: (916) 327-4478
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CONFERENCE COMPLETED
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Bill No: AB 2086
Author: Knowles (R), et al
Amended: Conference Report No. 1, 7/7/96
Vote: 27 - Urgency
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PRIOR SENATE VOTES: Not Relevant
SENATE FLOOR: 21-14, 7/11/96
AYES: Alquist, Ayala, Calderon, Costa, Haynes, Hurtt,
Johannessen, Johnson, Kelley, Leonard, Leslie, Lewis,
Maddy, Monteith, Mountjoy, O'Connell, Peace, Rogers,
Russell, Thompson, Wright
NOES: Boatwright, Hayden, Hughes, Johnston, Killea, Kopp,
Lockyer, Marks, Mello, Petris, Polanco, Rosenthal, Solis,
Watson
NOT VOTING: Beverly, Craven, Dills, Greene, Sher
CONFERENCE COMMITTEE VOTE: 5-1, 7/7/96
AYES: Senators Calderon, Lewis; Assemblymembers Knowles,
Ducheny, Aguiar
NOES: Senator Rosenthal
ASSEMBLY FLOOR: 56-17, 7/10/96 - See last page for vote
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SUBJECT: Earthquake insurance: California Earthquake
Authority:
cleanup legislation to AB 13 of 1995
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SOURCE: The author
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DIGEST: Conference Committee Amendments delete the prior
version of the bill's language concerning the California
Earthquake Authority.
The bill now enacts the Homeowners' Insurance Availability
Act of 1996, or the Knowles Act, which is connected to SB
1993 (Calderon) which has the effect of making the
California Earthquake Authority (CEA) operational. This
bill, in general, provides for the following:
1. Revises the membership of the authority's advisory panel
and, in general, provide for its appointment by the
Governor, rather than the Insurance Commissioner; and
provide for four-year terms.
2. Provides that there shall be a limited civil immunity on
account of any act performed or omitted or obligation
entered into on the part of the authority's governing
board, advisory panel, or any member of either. It
would also revise conflict-of-interest provisions
relating to the authority.
3. Provides for claims against the authority and
indemnification by the authority of participating
insurers, as specified.
4. Revises provisions relating to initial operating capital
to permit certain small insurers to make installment
payments and to provide for associate participating
insurers.
5. Revises provisions relating to revenue bonds.
6. Revises provisions relating to insurer assessments.
7. Make related changes.
ANALYSIS: Existing law, enacted by AB 13 (McDonald) of
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1995, establishes the California Earthquake Authority
(oCEAo). It authorized the Insurance Commissioner to take
actions necessary to create CEA, but made CEA operational
only upon subsequent legislative authorization. Before it
could be authorized, AB 13 required satisfaction of the
following conditions:
1. The Internal Revenue Service has granted the authority
tax-exempt status.
2. 75 percent of the residential insurance market have
signed letters of intent to join CEA and to make capital
contributions of not less than $750 million and up to $1
billion, to start up CEA. (See Section 10089.15, on
page 10 of AB 13.)
3. The Insurance Commissioner has obtained firm reinsurance
commitments for not less than $1.5 billion and up to $2
billion.
In addition, AB 13 directed the commissioner to seek
contracts for the investment of private capital to increase
the capacity of the fund, and to report back to the
Legislature by January 30 on the availability of and the
terms and conditions for such investments. The
commissioner has reported that $1.5 can be raised from
private capital.
As proposed in AB 13, CEA would have a ocapacityo of $10.5
billion upon its startup. (This figure assumes 100%
participation by the insurance industry. A lower
percentage of participation will yield a proportionately
lower startup capacity. For purposes of consistency, this
analysis will use numbers assuming 100 percent
participation, except as otherwise noted.
The $10.5 billion of capacity would be comprised as
follows:
1. The first billion would be contributed by participating
insurers. This "seed money" will fund the operations of
CEA as premiums start to flow in.
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2. The next $3 billion of capacity is garnered from a
contingent assessment upon participating insurers if an
earthquake event results in claims exceeding the
available capital of CEA. This contingent liability may
be "rolled-off", beginning in year three, a dollar for
each dollar over $1 billion in the available capital of
CEA. A roll-off in any one year would be limited to
$450 million, 15 percent of aggregate liability.
However, at the end of ten years, this $3 billion
contingent liability is rolled-off entirely, regardless
of the available capital in CEA.
3. The next $2 billion of capacity (from $4 billion to $6
billion) is provided by reinsurance contracts.
4. The next $1 billion of capacity (from $6 billion to $7
billion) is provided by an assessment on CEA earthquake
insurance policyholders.
5. The next $1.5 billion of capacity (from $7 billion to
$8.5 billion) is provided by the sale of private capital
market investment bonds.
6. The final $2 billion of the so-called oCEA layer cakeo
is provided by an additional contingent assessment on
participating insurers. This contingent assessment
liability may be rolled-off, a dollar for each dollar
over $6 billion in the available capital of CEA.
AB 13 provides a "firewall" to insulate the state from
lawsuits from policyholders who receive pro-rata payments
from CEA in the event the authority lacks sufficient funds
to pay all claims following an earthquake.
AB 13 also provides that if CEA becomes insolvent or ceases
to operate, the residential property insurer's duty to
offer earthquake insurance is renewed.
AB 13 of 1995 passed the Senate 26-7:
AYES: Alquist, Ayala, Calderon, Campbell, Costa, Haynes,
Hughes, Hurtt, Johannessen, Johnson, Kelley, Killea,
Kopp, Leslie, Lewis, Maddy, Monteith, Mountjoy,
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O'Connell, Peace, Rogers, Rosenthal, Russell, Thompson,
Watson, Wright
NOES: Hayden, Johnston, Leonard, Lockyer, Marks, Mello,
Petris
NOT VOTING: Beverly, Boatwright, Craven, Dills, Greene,
Polanco, Solis
Specifics of AB 2086
1. Advisory Panel Membership to CEA:
Present law provides for an advisory panel to give
advice to the CEA's governing board which the Insurance
Commissioner has the most appointees. The commissioner
is a nonvoting, ex-officio member.
This bill now provides the Governor with seven of the 13
members. The commissioner will appoint three members
(two insurer representatives and one agent
representative). The bill specifies that one of the
five public members is to be a consumer representative.
Panel members are to serve four-year terms, rather than
the present two-year terms. The legislative
appointments are not changed.
2. Limited Civil Liability:
This bill provides for limited civil immunity on account
of any act done or omitted or obligation entered into on
the part of the authority's governing board, advisory
panel, or any member of either. Specifies that the
authority must act under the covenant of good faith and
fair dealing.
Specifies that the CEA is liable for damages including
Section 3294 of the Civil Code for breach of covenant of
good faith and fair dealing by the Authority or its
agents. Participating insurance carriers are to be
liable for any damages for a breach of a common law or
statutory duty as if it were a contracting insurer.
However, the CEA is to indemnify the participating
carriers from any liability resulting from the
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Authority's actions or directives.
The governing board would not indemnify a participating
carrier for any loss resulting from failure to comply
with directives of the Authority or from violating
statutory, regulatory, or common law governing claims
handling practices.
3. Civil Service/Employment:
This bill specifies the following concerning the above
issues:
A. Specifies that the total number of CEA employees
subject to Civil Service provisions is not to exceed
25 people.
B. Specifies that when the CEA hires multiple private
money managers to manage the assets of the CEA, the
Authority is to consider small California based-firms
which are qualified to manage the money in the
California Earthquake Authority Fund.
4. Operational Factors That Must Be Met Before the CEA Can
Sell Earthquake Policies
Present law requires that various objectives of the
California Earthquake Authority first be met before it
is operational. They include the following:
A. The Internal Revenue Service must first determine
that the Authority will be or is exempt from federal
taxes.
B. Insurers whose cumulative residential property
market share is more than 75 percent of the total
residential property insurers market must have filed
letters of intent to participate in the Authority.
C. The CEA must obtain letters of intent and binding
contractual obligations for capital contributions as
required by the CEA.
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D. The Authority must obtain appropriate reinsurance in
an aggregate amount of not less than 200 percent of
the total capital contributions made by participating
insurers (a minimum of $1.4 billion).
This bill changes the percentage in (b) to 70 percent,
and specifies that no insurer is to be allowed to
transfer any earthquake risks to the Authority until
they have met the capital contributions requirements set
forth in statute.
5. Small Market Share Company Incentives:
This bill provide for certain incentives to small market
share companies which do business in California
regardless of their financial strength.
This bill allows insurers with less than 1.25 percent of
the California residential marketplace and less than $1
billion in surplus to pay for the original capital
contribution in 60 monthly installment payments. In
addition to the above, the CEA Board, upon findings and
recommendations that it is necessary to broaden the
availability of residential property or residential
earthquake insurance, is authorized to open the
Authority to participation by insurers which have not
elected to enter the CEA by the normal payment concept.
This includes the offering of incentives for insurers to
participate in the Authority and the creation of an
"associate participating insurer" provision. The
associate participating insurer is to be allowed to
place all new policies of residential earthquake
insurance within the Authority and maintain its existing
private insurance within its own company.
In order for the CEA Board to establish various
incentives, as well as create the associate
participating insurer classification, the following
requirements must be met by the board:
A. All board actions shall be conducted in public;
B. The board must wait at least one year from the date
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in which the Authority writes new policies of
earthquake insurance;
C. The board shall not modify the post-disaster payment
requirements of participating insurers;
D. Regulations must be adopted to implement these
incentives under the normal process of public review
and scrutiny;
E. Any incentives provided must be used by an entire
insurer group and cannot be used solely by one
subsidiary of an insurer group;
F. All materials used to determine the need to expand
the CEA shall be public documents;
G. Any associated participating insurer shall not
cancel or refuse to renew a residential property
insurance solely because the insurer has accepted the
offer of earthquake coverage; and
H. Associate participating carriers shall be required
to follow a maintenance of effort requirement.
6. Issuance of Bonds:
This bill makes changes to the bonding authority to
allow the State Treasurer to issue investment grade
revenue bonds or secure debt financing through any
combination of the sale of revenue bonds or debt
financing in an amount up to $1 billion.
This maximum amount may be lowered and must be adjusted
to reflect the percentage of participating insurers.
The amendment also caps the assessment at a maximum of
$1 billion and is not a revolving $1 billion assessment.
It specifies that failure of the Authority to obtain
such funding for any reason is not to obligate the State
of California to provide or arrange replacement funding
for the Authority.
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The bill allows the Treasurer to sell revenue bonds for
the purpose of refunding the revenue bonds or other debt
financing when authorized to do so by the CEA board, and
the surcharge authorized by law may be used to repay
that refunding.
7. Recapitalization Requirement:
This bill makes clarifying changes, along with SB1993,
concerning increased insurer recapitalization requirement
following a disaster. This bill also increases this amount
from the current $200 million to $350 million.
8. Pro-Rata Payments/Relinkage:
This bill states that in the event the board determines
that all the Authority's available capital is exhausted,
the board shall draw up and present to the Insurance
Commissioner a plan to pay policyholder claims on pro
rata basis or in installment payments.
At this point, the commissioner is to adopt a schedule
for reinstitution of an insurer's statutory obligation
to offer earthquake coverage by a means other than
placement in the CEA. In no event is the commissioner
to develop a schedule for re-entry into the market that
requires a period longer than six months. This is to
ensure that there is relinkage following a huge
earthquake, yet provides both insurers and consumers
adequate time to develop and review rate applications.
9. Actuarially Sound Rates:
This bill makes a clarifying change in AB 13's
provisions concerning rates established by the CEA to
be actuarially sound. The one change made from AB 13 is
the statement that "rates established by the Authority
shall be actuarially sound so as to not be excessive,
inadequate or unfairly discriminatory." The originally
actuarially sound provisions stated that "rates
established by the Authority shall be actuarially sound
and shall not be excessive, inadequate or unfairly
discriminatory." This is similar to the way that
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automobile assigned risk program rates are handled in
current law.
10. Legislative Review of Earthquake Linkage:
This bill adds a new section that states if the
Authority ceases operation pursuant to statute enacted
by the Legislature, that statute shall determine the
duty of participating insurers to provide earthquake
insurance under the current "mandate to offer" law
found in Section 10081.
This section is intended to encourage the Legislature to
review the merits of the requirement that insurers offer
earthquake coverage at the time of the sale of
homeowners' coverage. Although it requires this review,
it does not remove or alter the current requirement that
an insurer sell earthquake insurance with homeowners'
insurance.
This bill states that provisions of the bill are severable
and that it is to be enacted only if SB 1993 is enacted.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
Local: No
Undetermined cost to the State General Fund from the loss
of revenues due to exemption of CEA policies from t he
Gross Premium Tax.
SUPPORT: (Verified 7/8/96)
Coalition For a California Earthquake Authority consisting
of the following groups:
California Chamber of Commerce
California Business Roundtable
League of California Cities
California State Council of Laborers
California Manufacturers Association
California Apartment Association
Association of Bay Area Governments
California Building Industry Association
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California Seismic Safety Commission
California State Firefighters' Association
California Mortgage Bankers Association
California Fire Chiefs Association
Building Industry Association of Central California
California Land Title Association
Long Beach Chamber of Commerce
Fire District Associations of California
California Bankers Association
Associated Builders and Contractors
California Escrow Association
Personal Insurance Federation of California
California Association of Mortgage Bankers, Inc.
Insurance Brokers and Agents of the West
Roofing Contractors Association of California
California Association of Life Underwriters
Farmers Insurance Group
California Plumbing and Mechanical Contractors Association
National Association of Independent Insurers
State Farm Insurance Companies
California Association of Realtors
Alliance of American Insurers
Newhall Land and Farming Company
Insurance Agents and Brokers Legislative Council
California Business Properties Association
Automobile Club of Southern California
Freddie Mac
Various cities, local chambers of commerce and local
building
industries' associations
OPPOSITION: (Verified 7/8/96)
Consumers Union
Prop 103 Enforcement Project
Consumers Attorneys of California
United Policyholders
Zenith Insurance (7/10/96)
ARGUMENTS IN SUPPORT: According to the author's office,
the CEA will be a public instrumentality, financed by up to
$1 billion, but with at least $700 million in private
capital contributions from participating insurers. (The
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smaller number and numbers reflect a CEA with 70 percent
participation from all insurers; the larger number and
numbers reflect 100 percent participation. As the percent-
age of participation grows, premium income, capacity, and
exposure will grow proportionately.) The CEA will be
backed up by at least $3.5 billion to $5 billion of
additional contributions from insurers, and at least $1.4
billion to $2 billion of reinsurance (and potentially
more), up to a maximum of $1 billion in policyholder
assessments and up to $1.5 billion in private capital
investments. Assuming 100 percent participation, the CEA
will have a startup capacity of $10.5 billion. Assuming no
losses, the CEA will have a capacity of around $17 billion
in its 10th year of operation.
The Personal Insurance Federation indicates that the CEA is
financially sound and provides a solid financial framework
to ensure that consumers will have better benefits
following the next earthquake. CEA provides the quickest
means available to accumulate capital to pay for
earthquakes. Because it is exempt from federal taxes, CEA
is able to keep any unclaimed dollars. It will open the
homeowners and earthquake insurance market for consumers
without requiring de-linking. It provides incentives for
smaller insurers to enter the California homeowners
marketplace which current marketplace has yet to provide.
They state CEA will provide consumers with more options and
more affordable prices. The state has no liability for CEA
claims and consumers who voluntarily join the CEA can only
be assessed one time.
They concur with the urgency statements found in both
AB2086 and SB1993 that their enactment will promote the
restoration of affordable and available homeowners
insurance for all Californians, provide protection from the
devastating and catastrophic losses caused by earthquakes,
and continue California's economic growth. They believe
that both measures will serve to allow all their member
companies which choose to participate in the CEA to
increase the sale of homeowners insurance throughout
California. This is important not only to the insurers and
agents, but to consumers who are currently left with very
few options in purchasing homeowners insurance.
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They believe that both measures create a workable and
balanced California Earthquake Authority. SB 1993 provides
increased coverage to consumers and places additional
liability on participating carriers in the event of losses
following a major earthquake within the first 12 years of
the CEA's operation. AB 2086 increases the liability that
insurers have in settling claims and provides other
additional protections and safeguards to consumers that
were not originally contemplated in either of the original
CEA measures (AB13 and Preprint 5).
The Seismic Safety Commission, since 1990, has encouraged
the state to develop a pre-funded, tax-exempt,
state-sponsored earthquake insurance program that would
provide protections to homeowners and the insurance
industry from losses resulting from earthquakes. The
Seismic Safety Commission states that it understands that
the main thrust behind the bill is to alleviate the
restrictions placed upon the homeowners insurance market,
and the implications thereof, as a result of the mandate to
offer earthquake insurance with each homeowners policy
sold. In the commission's view, the Legislature response
has been a positive one. The proposal maintains the
general public's ability to protect themselves from losses
resulting from earthquakes, spreads the risk of future
losses amongst various parties to prevent the over-exposure
of any particular group, establishes a pre-funded program
that upon creation should be able to handle the insured
losses of a major earthquake in California, and finally,
should speed economic recovery after such an event.
ARGUMENTS IN OPPOSITION: Consumers Union states, " as
drafted the proposed conference report would seriously harm
consumers." They state that under normal circumstances,
when homeowners buy an insurance policy, they pay the
stated premium and in return receive the agreed-upon
payment for their losses. That's what insurance is: a
premium in exchange for coverage and payment for losses.
The CEA contained in the report, however, would have
consumers buy an insurance policy which notifies them in
bold-faced, 14-point type that any claims filed may not be
paid in full due to inadequate funds in the CEA. Even if
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the claim is not fully paid or even if the CEA policyholder
did not file a claim, they be assessed for more money if
the CEA funds fall short. What the notice does not divulge
is that the assessment may continue for an indefinite
number of years.
Furthermore, in the event of inadequate funding in the CEA,
which is a real likelihood, assessments on consumers may be
imposed before insurers and perhaps even before reinsurance
is tapped. The fact that the CEA has to warn homeowners
that they may not receive payment and that they may face
assessments is clear evidence that the CEA is
under-capitalized."
Consumer Attorneys of California indicate the bills will
weaken the program and subject homeowners and claimants to
additional risk. They believe that repealing the language
deeming CEA as an insurer will lead to additional
litigation, causing unnecessary expense and delay in
resolving disputes involving CEA policies. They believe
that the program will harm California's homeowners if there
is a significant delay in reinstating the mandate to offer
earthquake insurance following financial failure of the
CEA. Delaying relinkage would have one-half or more of the
program's policyholders without any earthquake insurance
for at least one year, subjecting them to great financial
risk and jeopardizing the status of their home loan.
They also state that the new category of associate member
could join the CEA without any initial capital
contribution, and could even be provided with unspecified
incentives. Adding exposure from these associate members,
without any initial capital contribution to back up this
risk, will increase the risk of financial failure of the
CEA, and make it much more likely that policyholders will
be assessed to help pay for their own claim cost.
Lastly, they state, "It has been claimed that failure to
adopt this program would precipitate a crisis in the
homeowner's insurance field. However, it is their
understanding that a number of insurers are actively
writing new business, including the non-renewal 20th
Century policyholders, throughout the state. Furthermore,
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individual efforts by insurers, such as the innovative
reinsurance program undertaken by the Farmers Group or the
realignment strategy employed by the Allstate Group, are
helping these companies meet their financial obligations
without the need for a massive bail-out such as the CEA.
With the major break given the industry last year by
adoption of the mini-policy, insurers' exposure to
earthquake losses was cut in half. With these other
actions, the industry is taking necessary steps to protect
itself without shifting unreasonable risk onto
policyholders.
United Policyholders indicates the only long term solution
is to restore free competition to the California
homeowner's and earthquake markets. They state there is no
reason to create a huge state bureaucracy to bail out three
insurance carriers (State Farm, Farmers, and Allstate) in
order to sell a product that can and should be sold in the
private market place. Insurance carriers have asked for
"de-linkage" in order to restore competition to the market
place. This proposal, de-linkage plus an Earthquake FAIR
Plan, will achieve that result but also guarantee that
every consumer that wants an earthquake can get one.
ASSEMBLY FLOOR:
AYES: Ackerman, Aguiar, Alby, Alpert, Baca, Baldwin,
Battin, Baugh, Boland, Bordonaro, Bowen, Bowler, Brewer,
Brown, Brulte, Bustamante, Cannella, Conroy, Cunneen,
Davis, Ducheny, Figueroa, Firestone, Frusetta, Gallegos,
Goldsmith, Granlund, Hannigan, Harvey, Hauser, Hawkins,
Hoge, House, Kaloogian, Knight, Knowles, Kuykendall,
Machado, Margett, Mazzoni, McPherson, Miller, Morrissey,
Morrow, Olberg, Poochigian, Rainey, Richter, Rogan,
Setencich, Takasugi, Thompson, Tucker, Weggeland, Woods,
Pringle
NOES: Archie-Hudson, Bates, Burton, Campbell, Escutia,
Friedman, Isenberg, Katz, Knox, Kuehl, Lee, Martinez,
Migden, K. Murray, W. Murray, Sweeney, Villaraigosa
NOT VOTING: Caldera, Cortese, Napolitano, Speier,
Vasconcellos
DLW:ctl 7/11/96 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
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