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