BILL ANALYSIS �
AB 2064
Page 1
Date of Hearing: April 23, 2014
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 2064 (Cooley) - As Amended: April 21, 2014
SUBJECT : Earthquake Insurance
SUMMARY : Updates existing statutory notice requirements
related to earthquake insurance and clarifies existing statutory
limits on spending by the California Earthquake Authority (CEA).
Specifically, this bill :
1)Revises the earthquake insurance notice, including an offer to
purchase earthquake insurance, that is required to be provided
when a residential property insurance policy is purchased.
2)Increases the cap on CEA operating expenses to 5% of premiums
collected.
3)Defines the term "operating expenses" for the CEA budget.
4)Clarifies that CEA policies become effective upon receipt by
the participating insurer of a signed application and premium
payment.
5)Requires participating insurers to provide policy holders who
have not purchased earthquake insurance with information
regarding the availability and cost of earthquake insurance
when they issue or renew a policy of residential property
insurance.
6)Delays implementation of the bill until July 1, 2015.
EXISTING LAW :
1)Requires that individuals purchasing a homeowner's insurance
policy be offered an earthquake insurance policy that meets
minimum requirements.
2)Establishes the CEA as a publicly managed insurer to provide
earthquake insurance.
3)Requires that homeowners be notified of their right to
purchase earthquake insurance upon the issuance of a
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homeowner's insurance policy.
4)Requires that holders of a homeowner's insurance policy who do
not have earthquake insurance be notified of their right to
purchase earthquake insurance at least every other year.
5)Requires that the notice begin with the following sentence:
"YOUR POLICY DOES NOT PROVIDE COVERAGE AGAINST THE PERIL OF
EARTHQUAKE."
FISCAL EFFECT : Undetermined
COMMENTS :
1)Purpose . According to the author, homeowners have the right
to purchase earthquake insurance but very few Californians
take advantage of that right. The current law requires
insurers to make the offer of earthquake insurance in a form
that is written at a twelfth grade reading level, uses
insurance industry jargon, and intimidates many consumers. An
updated offer that is written in a more consumer-friendly
fashion may encourage more consumers to buy earthquake
insurance. In addition, existing statute limiting CEA
operating expenses is unclear and is preventing the CEA from
being more effective in reaching out to Californians who don't
have earthquake insurance.
2)California Earthquake Authority . The CEA was formed through
legislation in 1995 and 1996 to address an
insurance-availability crisis that followed the 1994
Northridge earthquake. After that earthquake, many homeowners
found it difficult or impossible to find basic homeowner's
insurance. Many others were faced with the prospect of having
their homeowners' insurance non-renewed as insurance companies
tried to shed their exposure to earthquake risk. Because
state law requires insurers to offer earthquake insurance to
their applicants and holders of residential policies, the
insurers' retreat from the California market resulted in an
availability crisis for both homeowners and earthquake
insurance. The California Department of Insurance reported in
the summer of 1996, at the height of the crisis, that 95
percent of the homeowners' insurance market had either
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stopped, or severely restricted, sales of new homeowners'
policies.
After the CEA began operations in December 1996, the
California homeowners' insurance market recovered quickly. A
Department of Insurance report noted that at the peak of the
availability crisis, 82 insurers had restricted the sale of
new homeowners' insurance policies. By October 1997, only
three insurers were restricting the sale of new policies.
Since that time, the requirement to offer earthquake insurance
has not been a factor in restricting the availability of
homeowners' insurance.
3)Notice . Existing law requires insurers to provide consumers
with a notice of their right to purchase (including details
regarding the coverage and premium offered) earthquake
insurance and the text of that notice is specified in statute.
The required text of this notice is littered with insurance
jargon and is unlikely to be useful to all but the most
determined or informed consumer. The bill revises that notice
dramatically and replaces much of the insurance jargon with
language more likely to be understood by the average consumer.
This notice is central to the earthquake insurance market and
it is likely that the revised notice will be subject to
ongoing revision as the bill progresses through the
legislative process.
4)Take Up Rate . In 1996 (the year the CEA began operating) over
there were over 2 million policyholders with earthquake
insurance. That number shrank to just over 1 million policies
in 2012. The CEA reports that it issues three-quarters of the
earthquake policies in California and is the largest
earthquake insurer in the United States with approximately
840,000 policies in place today.
5)Operating Expenses . Existing law caps the "operating
expenses" of the CEA at 3% of the premium collected by the
CEA. This cap was established based on an expectation that
the take-up rate for earthquake insurance would be
approximately 30% instead of the approximately 9% experienced
in recent years. As a result, the CEA has a lower cap figure
than expected and that lower cap figure has created budgetary
pressure. In response to that pressure the CEA made a number
of adjustments to how it classifies expenses to create space
under the cap. This bill increases the cap to 5% of premium
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collected to reflect the lower take-up rate and free the CEA
from the need to engage in budgetary maneuvers to stay under
the 3% cap. The bill also defines "operating expenses" to
provide the CEA with clearer guidance regarding the cap on
operating expenses. These changes should relieve the pressure
that has driven the reclassification of expenses in previous
budgets.
6)Related Legislation . The committee passed AB 2735 (Committee
on Insurance) this year that clarifies existing requirements
to provide homeowners with notices of their right to purchase
earthquake insurance.
REGISTERED SUPPORT / OPPOSITION :
Support
California Earthquake Authority (sponsor)
Personal Insurance Federation of California (if amended)
Opposition
None received
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086