BILL ANALYSIS CONFERENCE REPORT COMMITTEE ANALYSIS . Bill No: AB 2086 Author: Knowles RN: 9622994 Report date:July 7 . 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" ?1 CONTINUED AB 2086 Page 2 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 ?2 CONTINUED AB 2086 Page 3 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 ?3 CONTINUED AB 2086 Page 4 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. ?4 CONTINUED AB 2086 Page 5 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. ?5 CONTINUED AB 2086 Page 6 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 ?6 CONTINUED AB 2086 Page 7 SENATE RULES COMMITTEE AB 2086 Office of Senate Floor Analyses 1020 N Street, Suite 524 (916) 445-6614 Fax: (916) 327-4478 . CONFERENCE COMPLETED . Bill No: AB 2086 Author: Knowles (R), et al Amended: Conference Report No. 1, 7/7/96 Vote: 27 - Urgency . 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 . SUBJECT: Earthquake insurance: California Earthquake Authority: cleanup legislation to AB 13 of 1995 ?7 CONTINUED AB 2086 Page 8 SOURCE: The author . 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 ?8 CONTINUED AB 2086 Page 9 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. ?9 CONTINUED AB 2086 Page 10 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, ?10 CONTINUED AB 2086 Page 11 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 ?11 CONTINUED AB 2086 Page 12 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. ?12 CONTINUED AB 2086 Page 13 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 ?13 CONTINUED AB 2086 Page 14 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. ?14 CONTINUED AB 2086 Page 15 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 ?15 CONTINUED AB 2086 Page 16 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 ?16 CONTINUED AB 2086 Page 17 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 ?17 CONTINUED AB 2086 Page 18 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. ?18 CONTINUED AB 2086 Page 19 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 ?19 CONTINUED AB 2086 Page 20 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, ?20 CONTINUED AB 2086 Page 21 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 ?21 CONTINUED AB 2086 Page 22 SUPPORT/OPPOSITION: SEE ABOVE **** END **** ?22 CONTINUED