California lawmakers have approved and sent to the governor a measure that restructures and reduces backup catastrophe assessments on insurers participating in the California Earthquake Authority.
The bill, which Gov. Arnold Schwarzenegger is expected to sign, would replace existing legislation creating the quasi-public CEA, which is due to sunset in December of next year.
Organized 12 years ago with $700 million from participating home insurers, based on their share of the market, the tax-free fund now has $2.65 billion in immediate capital on hand. Under current law, in the event of a catastrophe exceeding that amount, insurers would be immediately assessed $2.2 billion and, if additional monies were needed, the fund would begin dipping into layers of reinsurance and eventually go to revenue bond money before finally hitting insurers with another assessment of $1.5 billion.
Under the bill that has been approved, the current $2.2 billion assessment would be reduced to $1.3 billion. In a restructuring, that $1.3 billion would only be assessed after the CEA had used up its layers of reinsurance, bond money and the $1.5 billion assessment.
The new legislation would also give the board that controls the CEA the ability to ask a newly joining insurer to pay a higher, nonrefundable initial assessment if they bring a risk portfolio with a higher level of risk.
Under California law, all home insurers must offer earthquake insurance; for participating carriers, their offering comes through the CEA.
Sam Sorich, with the Association of California Insurance Companies (ACIC), said that on the CEA board composed of the governor, state treasurer and insurance commissioner; only the treasurer had not supported the legislation.
Under the bill, the total claim-paying capacity of the CEA would remain at $8.5 billion before gains on tax free investments.
ACIC, the American Insurance Association (AIA) and the Personal Insurance Federation of California (PIFC) supported the legislation.
The groups said the bill's funding arrangement is "vital" to maintaining the investment-grade rating (A-minus) that A.M. Best Co. rating agency has said it will assign to the CEA if SB 430 becomes law.
They said Best has also indicated that the passage of SB 430 will result in the CEA being redesignated from a "negative outlook" to a "positive outlook."
"Without SB 430, the CEA will not have adequate financial backing and will have to disclose that it may not be financially viable by the end of 2007," said Rex Frazier of PIFC, Ken Gibson of AIA and Mr. Sorich of ACIC.
They said the CEA being financially unviable could ultimately result in it being downgraded to junk bond status. If SB 430 is not enacted, they predicted it will be very difficult for the CEA to renew and write new policies starting in December 2007.
They further forecasted that if the CEA can't sell or renew policies, the availability of earthquake insurance coverage for homeowners in California will decline and many Californians living in earthquake-prone regions of the Golden State will be unable to get the coverage they need.
"SB 430 represents many months of discussions to forge common ground to ensure the protection of California homeowners and broad availability of earthquake coverage that is integral to protecting a homeowners' market that has already suffered recently from other significant problems," their joint statement said.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.