NU Online News Service, March  22, 10:55 a.m.EST

U.S. Senators Barbara Boxer and Dianne Feinstein have introduceda bill that would authorize the U.S. Department of the Treasury toguarantee up to $5 billion in bonds available to certified publicentities like the California Earthquake Authority (CEA) following a"mega-catastrophe."

The senators, both Democrats from California, said the bill (S637)—dubbed the Earthquake Insurance Affordability Act—would better equipstates like California to recover from natural disasters and makeearthquake insurance more affordable.

The bill was introduced on March 17 and has been referred to theCommittee on Banking, Housing and Urban Affairs.

Glenn Pomeroy, chief executive of the CEA, says the federalmeasure would allow the CEA to reduce rates because it would cutdown on the association's reliance on reinsurance. Right now, about40 percent of premiums collected go to buy reinsurance due torequirements by rating agencies that the CEA be prepared for a1-in-500-year event, Pomeroy says. About $200 million ofreinsurance is purchased for about $3 billion covered by theCEA.

"If we were to continue to be solely dependent on this type ofrisk transfer, we would never be able to get this coverageaffordable," says Pomeroy, who added that only about 12percent of homes with a homeowner's policy in California also haveearthquake insurance.

If the bill passes as is, Pomeroy says the CEA would be able toreduce premiums by one-third immediately.

The federal guarantees would only be needed if the CEA, or otherentities like it, were to exhaust all claims-paying ability. Forthe CEA, there is a less than one percent chance of anevent occurring that is large enough to wipe out the organization'sassets.

Essentially, the CEA is looking to collect enough to withstand alikely event and borrow for a significantly unlikely event.

If the bonds are triggered, Pomeroy says they can be paid backwith "moderate premium adjustments."

The federal government would only back borrowing from entitieslike the CEA that could prove their ability to repay the debt. Infact, based on its premium numbers, the CEA could only gain accessto about $1.5 billion of the $5 billion in bonds guaranteed by thefederal government.

Pomeroy says that gives an opportunity for other CEA-likeorganizations to form in order to take advantage of thegovernment-backed bonds.

The bill is similar to the CatastropheObligation Guarantee Act (COGA) of several years ago, whichlooked for Treasury to guarantee bonds issued by state catastrophefunds in Florida, Louisiana and Texas, as well as the CEA.