BILL ANALYSIS
CONFERENCE REPORT COMMITTEE ANALYSIS
.
Bill No: SB 1993
Author: Calderon
RN: 9623214
Report date: July 7, 1996
.
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 odouble-joined,o
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.oMandateso insurers which sell homeowners insurance to
ooffero policyholders the option of purchasing
oearthquake insurance,o 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 oconcurrent causationo (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 oFAIR Plano to issue obasic
property insuranceo to property owners who are unable to
purchase insurance through voluntary market mechanisms.
4.Allows insurers to comply with the omandate to offero
?1
CONTINUED
SB 1993
Page
2
earthquake insurance (see #1) by selling a ono-frillso
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 claims 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 $2
billion times the percentage of the market
which elects to
participate
(c) the IRS has ruled the plan to be tax-exempt;
2.Make numerous substantive and technical changes to the
structure of the CEA as contained in AB 13. The more
?2
CONTINUED
SB 1993
Page
3
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.
c)An increase, from $100 million to $350 million in funds,
below which the CEA must call in contingent capital owed
by insurers.
d)The addition of condominium oloss assessmento coverage as
part of the CEAos basic coverage package, 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 CEAos
oadvisory panel.o
f)An extension of insurerso contingent capital obligation,
allowing for possible collection for up to 12 years (as
compared to 10 years under AB 13), but only after all
other sources of funding have been exhausted.
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
the statutes, regulations, and common law rules which
apply to insurers when dealing with applicants and
policyholders.
h)Clarifying language to the effect that the basic
procedures of Proposition 103 will apply to ratemaking
and rule making functions of the CEA.
?3
CONTINUED
SB 1993
Page
4
i)Language which narrows the scope of AB 13os 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 CEAos plan to obtain $1.5 billion of
capital market capacity.
k)Additional language which renders all revenue of the CEA
dedicated to repayment of debt incurred to finance the $1
billion policyholder assessment layer, even if that means
that future claims are pro-rated.
l)Preferences for so-called osmall insurers.o 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 oassociateo participating insurer
and place new business only into the CEA. Among various
conditions related to oassociateo status, the Board is
empowered to offer oincentiveso 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.
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.
Key differences between the Proposed Conference Reports,
and SB 1993, the CEA bill passed by the Senate:
?4
CONTINUED
SB 1993
Page
5
1.Policyholder assessment layer returned to greater risk AB
13 level. AB 13 placed CEA policyholders at risk for
osurchargeso 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. 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
orun-offo 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
orun-offo 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 10-year
formula, instead of having the contingent obligation
eliminated, it oruns upo 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.
3.oHomeownero policies cancelable to enforce policyholder
surcharge. If a policyholder surcharge is imposed, AB 13
enforced collection of the surcharge by providing for
cancellation of both the earthquake and the underlying
homeowners policy in the event the policyholder failed to
pay the surcharge. SB 1993, at the request of Senator
Peace, eliminated the potential that the underlying
homeowners policy could be canceled. This proposal
reinstates the AB 13 approach which allows the
cancellation of homeowner policies.
By: Insurance Committee; Mark Rakich
?5
CONTINUED
SB 1993
Page
6
*See Senate Rule 29.6 (b) for definition of oheardo.
(Upon completion, delete all instructions typed in italics,
file your analysis ASAP to SCIS laptops and notify the
Office of Senate Floor Analyses at 445-6614)
?6
CONTINUED
SB 1993
Page
7
SENATE RULES COMMITTEE SB 1993
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 445-6614 Fax: (916) 327-4478
.
CONFERENCE COMPLETED
.
Bill No: SB 1993
Author: Calderon (D)
Amended: Conference Report No. 1, 7/7/96
Vote: 27 - Urgency
.
PRIOR SENATE VOTES: Not Relevant
SENATE FLOOR: 21-13, 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, Watson
NOT VOTING: Beverly, Craven, Dills, Greene, Sher, Solis
CONFERENCE COMMITTEE VOTE: 5-1, 7/7/96
AYES: Senators Calderon, Lewis; Assemblymembers Knowles,
Ducheny, Aguiar
NOES: Senator Rosenthal
ASSEMBLY FLOOR: 51-22, 4/22/96 - See last page for vote
ASSEMBLY CONFERENCE FLOOR VOTE:
NOTE: Computer vote system does not have the vote on this
bill at this time. The companion measure, AB 2086 was
voted out 56-17, 7/10/96, which is included at the end of
this anaylsis.
?7
CONTINUED
SB 1993
Page
8
.
SUBJECT: California Earthquake Authority
SOURCE: The author
.
DIGEST: This bill along with AB 2086 (Knowles) allows
enactment of the California Earthquake Authority (CEA)
created by AB 13.
Conference Committee Amendments provide for the following:
1. Remove the Senate language concerning elimination of the
requirement for insurers that do not participate in CEA
to offer earthquake coverage, as specified and
requirement that insurers participating in CEA continue
to be required to offer earthquake coverage.
2. Delete limited immunity given to CEA personnel which is
now to be contained in AB 2086 the companion measure.
3. Delete provisions concerning powers and duties of the
Insurance Commissioner to seek court orders to protect
the authority.
4. Require a specified disclosure to be provided to an
insured if earthquake coverage is provided by a policy
issued by CEA.
5. Change definition of basic residential earthquake
insurance.
6. Provide for CEA to issue loss assessment policies for
individual condominium units.
7. Limit operating expenses of CEA.
8. Make CEA subject to the Political Reform Act.
9. Delete existing provisions that would have provided for
the reduction and eventual elimination of assessments by
?8
CONTINUED
SB 1993
Page
9
CEA of participating insurers, and instead provides for
the reallocation of the assessments, and the reduction
of the aggregate assessment to zero dollars in specified
circumstances after a specified period of time.
10.Make various changes in the financial structure and
recapitalization provisions of AB 13.
11.Increase reporting requirements to make CEA accountable.
12.Provide for a loan of $1.3 million to CEA from the
California Residential Recovery Fund, to be repaid with
interest, as specified.
13.This bill becomes operative only if AB 2086 (Knowles) is
enacted.
ANALYSIS: Existing law, enacted by AB 13 (McDonald) of
1995, establishes the California Earthquake Authority
(CEA). 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:
--The Internal Revenue Service has granted the authority
tax-exempt status.
--75% of the residential insurance market have signed
letters of intent to join CEA and to make capital
contributions of not less than $750,000,000, and up to $1
Billion, to start up CEA. (See Section 10089.15, on page
10 of AB 13.)
--The Commissioner has obtained firm reinsurance
commitments for not less than $1.5 billion dollars, and
up to $2 billion dollars.
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. He has reported
?9
CONTINUED
SB 1993
Page
10
that 1.5 billion can be raised from private capital.
As proposed in AB 13, CEA would have a ocapacityo of $10.5
billion dollars 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% participation
except as otherwise noted.
The $10.5 billion of capacity would be comprised as
follows:
--The first billion would be contributed by participating
insurers. This "seed money" will fund the operations of
CEA as premiums start to flow in.
--The next three 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 dollars in the available
capital of CEA. A roll-off in any one year would be
limited to $450,000,000, 15% 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.
--The next two billion of capacity (from $4 billion to $6
billion) is provided by reinsurance contracts.
--The next one billion of capacity (from $6 billion to $7
billion) is provided by an assessment on CEA earthquake
insurance policyholders.
--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.
--The final $2.0 billion of the so-called oCEA layer cakeo
is provided by an additional contingent assessment on
participating insurers. This contingent assessment
?10
CONTINUED
SB 1993
Page
11
liability may be rolled-off, a dollar for each dollar
over $6 billion dollars 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 passed the Senate 26-7, 9/15/95:
AYES: Alquist, Ayala, Calderon, Campbell, Costa, Haynes,
Hughes, Hurtt, Johannessen, Johnson, Kelley, Killea,
Kopp, Leslie, Lewis, Maddy, Monteith, Mountjoy,
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 SB 1993
1. States that the CEA can only become operational if
three key objectives are met:
a.The Internal Revenue Service has determined that the
CEA is tax exempt;
b.70% (not 75%) of insurers join the CEA; and
c.CEA has obtained at least 200% in reinsurance of the
total capital contribution committed (a $1.4 billion
minimum).
AB 2086 contains a similar provision in statute (SB 1993
is intent language).
2. Requires that CEA policyholders be provided with a
disclosure form outlining the limitations of the CEA
?11
CONTINUED
SB 1993
Page
12
earthquake policy to CEA policyholders.
3. Specifies that the definition of "available capital"
relative to CEA includes all interest or other income
from the investment of money held in the CEA Fund.
4. Changes the definition of basic residential earthquake
insurance.
SB 1993 increases the amount of additional living
expenses from $1,500 to $2,500 if after the first year
CEA has $700 million in available capital. If after the
second year, CEA maintains $700 million, then the
additional living expenses will again increase from
$2,500 to $3,000.
5. Defines "nonparticipating insurer" as an insurer that
elects not to transfer or place any residential
earthquake policies in CEA. Defines "participating
insurer" as an insurer that has elected to join CEA.
6. Specifies that CEA is to have the same duties to its
insureds that a private insurer currently has to its
insureds. CEA is also to have the same liabilities to
its insureds as an insurer has to its insureds. This
ensures that CEA policyholders have all of the legal
safeguards that private insurance polichholders
currently maintain.
7. Specifies that the operating expenses of CEA are to be
capped at not more than 3% of the premium income
received by CEA. Funds are to be available to pay any
advocacy fees awarded in a proceeding under Section
10089.11 of the Insurance Code.
8. Clarifies that all CEA rates be established in
accordance with Proposition 103. This includes the
right for consumers to intervene in both rate filings
and regulatory filings.
9. Specifies that the annual report to be submitted by CEA
to the Legislature include a description of all rates
and rating plans approved for use in CEA. It is also to
?12
CONTINUED
SB 1993
Page
13
include a statement of the current property assets,
liabilities, income, expenditures and reinsurance costs
to CEA.
It also requires in the annual report a separate,
summary report on the financial capacity of CEA to pay
claims made against CEA. It requires a statement of the
available capital, liabilities, pending surcharge
assessments and other basic issues fundamental to the
operation of CEA.
Copies of the report are to be made available to the
public.
10.Makes CEA subject to the Political Reform Act.
11.Declares that CEA is a public instrumentality of the
state, exercising an essential state function.
Prohibits CEA from becoming a debtor under the United
States bankruptcy laws and provides that claims against
the authority are to be governed under existing
provisions of the Government Code.
12.Continuously appropriates funds in the CEA Fund for the
purposes of the authority.
13.Makes several changes to the financial structure of
CEA. It maintains the present basic $10.5 billion
financial structure.
The bill increases the time period and the amount of
insurer liability for payment of losses associated with
claims made from CEA. It does this by allowing for the
reallocation of the first layer of insurer contingent
liability ($3 billion) should the available cash on hand
grow in excess to $1 billion. If this occurs, these
monies will transfer an insurer's contingent liability
to the very top layer of CEA liability. If CEA has $4
billion of available cash on hand, this new top layer
will roll off in year 11. Otherwise, the contingent
liability will not roll off for 12 years.
?13
CONTINUED
SB 1993
Page
14
The author's office provides the following information
on what they refer as "roll-up" to the above process
works:
"The first roll-up may not occur until the first
December 31st after CEA has been in operation for two
years. Any roll-up would be limited to 15% of the
aggregate to $450 million). Further, any roll-up in any
year must be backed by a dollar-for dollar buildup in
the available capital of CEA. So, the roll-up can occur
only to the extent the CEA builds additional available
capital. Thus, for example, if CEA accumulated $1.45
billion by the end of its third year, it could roll-up
$450 million. In order for another roll-up to occur,
CEA would have to build up additional available capital
in excess of $1.45 and would occur dollar-for-dollar for
those sums in excess of $1.45 billion (subject to a $450
million cap). And if, in that example, an earthquake
occurs which reduces the available capital after a
rollup, the CEA would have to build up to $1.45 billion
again and beyond before any more of the assessment
liability can rolled up.
The purpose of the above is to keep insurers on the hook
for a greater amount of money and for a longer time
period than AB 13. This also creates the ability for
the CEA to insure a $17 billion earthquake within a
10-year time period.
The bill also increases the dollar amount of
recapitalization that is provided for in the event that
CEA pays claims for an earthquake and is in need of
being recapitalized. Current law states that
recapitalization will be $200 million. SB 1993
increases this amount by $150 million to a total of
$350 million. This will ensure that CEA can get started
off on a better footing following moderate to major
earthquakes.
Policyholders cannot be assessed to recapitalize CEA.
14.Maintains in place the fact that insurers who choose not
to participate in CEA is to be subject to earthquake
?14
CONTINUED
SB 1993
Page
15
policyholder assessments under the California Insurance
Guaranty Association.
15.Requires an insurer that withdraws from the CEA under
certain circumstances to impose a premium surcharge on
earthquake policies to be used by the CEA to repay debt.
16.Provides that if legislation is enacted that causes CEA
to cease operations while debt of the CEA is
outstanding, participating insurers would be required to
impose a premium surcharge on earthquake policies to be
used by the authority to repay debt.
17.Provides for a $1.3 million loan to the CEA from the
California Residential Earthquake Recovery Fund in order
to implement the bill. The loan is to be repaid within
the first 12 months of operation of CEA with interest
due at the legal rate on the outstanding balance.
18.Specifies that the provisions of the bill are severable.
19.Becomes operative only if AB 2086 is enacted.
FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes
Local: No
Provides for a $1.3 million loan to CEA. Undetermined cost
to the state General Fund from the loss of revenue due to
exemption of CEA policies from the Gross Premium Tax.
SUPPORT: (Verified 7/8/96)
Coalition For a California Earthquake Authority
The Coalition includes 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
?15
CONTINUED
SB 1993
Page
16
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 Cos.
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 chamber of commerces' and local
building industries'
associations
California Seismic Safety Commission
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: The author's office states, CEA
will be a public instrumentality, financed by up to $1
billion but with at least $700 million in private capital
?16
CONTINUED
SB 1993
Page
17
contributions from participating insurers. (The smaller
number and numbers reflect a CEA with 70% participation
from all insurers; the larger number and numbers reflect
100% participation. As the percent- age of participation
grows, premium income, capacity, and exposure will grow
proportionately.) 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%
participation, CEA will have a startup capacity of $10.5
billion. Assuming no losses, CEA will have a capacity of
around $17 billion in its 10th year of operation.
The Personal Insurance Federation indicates that 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 delinking. 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 AB
2086 and SB 1993 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 who 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.
?17
CONTINUED
SB 1993
Page
18
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 prefunded, 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 prefunded 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 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
?18
CONTINUED
SB 1993
Page
19
due to inadequate funds in the CEA. Even if 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 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 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 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
homeowners 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,
?19
CONTINUED
SB 1993
Page
20
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 earth-
quake 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 indicate the only long term solution
is to restore free competition to the California homeowners
and earth- quake 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, Baca, Baldwin, Battin,
Baugh, Boland, Bordonaro, Bowler, Brewer, Brulte,
Bustamante, Cannella, Conroy, Cortese, Cunneen, Figueroa,
Firestone, Frusetta, Goldsmith, Granlund, Hannigan, Harvey,
Hauser, Hawkins, Hoge, House, Kaloogian, Knight, Kuehl,
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, Caldera, Davis,
Ducheny, Escutia, Friedman, Gallegos, Isenberg, Katz,
Knox, Lee, Martinez, Migden, K. Murray, W. Murray,
Napolitano, Speier, Sweeney, Vasconcellos, Villaraigosa
NOT VOTING: Alpert, Bowen, Brown, Campbell, Knowles
AB 2086 CONFERENCE FLOOR VOTE:
AYES: Ackerman, Aguiar, Alby, Alpert, Baca, Baldwin,
Battin, Baugh, Boland, Bordonaro, Bowen, Bowler, Brewer,
Brown, Brulte, Bustamante, Cannella, Conroy, Cunneen,
?20
CONTINUED
SB 1993
Page
21
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:lm 7/12/96 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
?21
CONTINUED