Earthquake Insurance for California Renters & Homeowners
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Transcript of Earthquake Insurance for California Renters & Homeowners
Earthquake Insurance for Earthquake Insurance for California Renters & California Renters &
HomeownersHomeowners
Presented to theBay Area Earthquake Alliance
Daniel P. Marshall, IIIGeneral Counsel
California Earthquake Authority
The Big PictureThe Big Picture
19921992AndrewAndrew
($15.5 B)($15.5 B)
20012001WTCWTC
($18.8 B)($18.8 B)
20042004Four StormsFour Storms
(Charley, Ivan, (Charley, Ivan, Frances, Frances, Jeanne)Jeanne)($18 B)($18 B)
19941994NorthridgeNorthridge($12.5 B)($12.5 B)
20052005Four StormsFour Storms
(Dennis, (Dennis, Katrina, Rita, Katrina, Rita,
Wilma)Wilma)($58 B)($58 B)
2008–2009 2008–2009 Storms: Storms:
Gustav, Ike; Gustav, Ike; Global Global
Financial Financial MeltdownMeltdown
($BB)($BB)
The economic risks of natural catastrophes have become increasingly evident over the last 15–20 years
7 of 10 most costly catastrophes have occurred since 2004
2008 was the third worst year on record for insured losses from natural disasters
Increasing government involvement in catastrophe insurance
and reinsurance: FHCF – 1993 CEA – 1996 TRIA – 2002 Citizens (FL) – 2002 Citizens (LA) – 2003 HR 3355 - 2007
These programs are intended to address the affordability and availability problems created by the large, lumpy, and unpredictable losses generated by these events.
States have implemented various structures, but all could benefit from certain access to post-event funding.
One Result
The Missing LinkThe Missing LinkThe Federal Government is the only entity that
can reliably address the timing risk created by natural catastrophes to promote availability and affordability of property insurance.
An integrated public/private partnership that minimizes direct federal participation, avoids subsidies, and promotes mitigation can provide the missing link to the long-term solution
One Approach – S.886One Approach – S.886What it is not:
◦ A Florida bailout◦ A comprehensive national catastrophe plan◦ A scheme to subsidize homeowners in high risk areas
What it does:◦ Provides limited debt guarantees for qualified state programs
that have: Actuarially sound rates Extensive public sector sponsorship and involvement A demonstrated ability to repay debt without support from the Feds
◦ Funding certainty provided by the program can: Strengthen existing state programs Enhance affordability for consumers Stabilize insurance markets Encourage new state program development with desirable financial
characteristics Limit need for post-event financing by the Feds
A Case Study: The CEA
1994: Northridge Earthquake• Total Loss: $40 B• Residential Loss: $14 B
1995: Insurance Crisis in California• Industry unsuccessfully sought repeal of mandatory EQ offer• 95% of residential market virtually stopped writing HO coverage
1996: CEA Established• Public instrumentality of the state• Privately financed and publicly managed• HO market restored
Today: Largest Provider of EQ Insurance in U.S.• 770,000 policyholders (70% of California residential EQ market)• $9.5 B claim-paying capacity
CEA Background
0%
10%
20%
30%
40%
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2008
26%
36%
12%
9%
CEA
12%
Take-up Rate: CA Residential EQ Take-up Rate: CA Residential EQ InsuranceInsurance
Northridge
California Earthquake AuthorityCalifornia Earthquake Authority1997-20081997-2008
TotalPolicyholderPremiumsCollected
$5.4B
TotalPolicyholderPremiumsCollected
$5.4B
Policyholders
Expenses * $1.0B
Expenses * $1.0B
CEA
CEACapital $2.1B
CEACapital $2.1B
Reinsurance Companies
Reinsurance Recoveries
$250,000
TotalReinsurance
Premium Paid
$2.3B
TotalReinsurance
Premium Paid
$2.3B
Major Expense Categories
1.Agent Commissions2.Debt Financing3.PI Fees4.CEA Operations
Reinsurance($200 M/year)
Reinsurance($200 M/year)
$3.3B CEA CapitalCEA Capital
$0.3B
$3.1B
$2.8B
Current Financial StructureTotal = $9.5B (Capacity 1-in-545 year)
A More Efficient Approach
California Earthquake AuthorityFinancial Structure
Revenue BondsRevenue Bonds
Industry Assessment
Layers
Industry Assessment
Layers
Post-Event BorrowingPost-Event Borrowing
CEA CapitalCEA Capital
Revenue BondsRevenue Bonds
Industry Assessment
Layers
Industry Assessment
Layers
Post-Event BorrowingPost-Event Borrowing
Industry Assessment
Layers
Industry Assessment
Layers
Post-Event BorrowingPost-Event Borrowing
Revenue BondsRevenue Bonds
ReinsuranceReinsurance
CEA CapitalCEA Capital
Capacity in each case: 1-in-500 Year
California Earthquake Authority
Financial Structure:Alternative Approaches
CEA CapitalCEA Capital
Post-Event BorrowingPost-Event Borrowing
Industry Assessment
Layers
Industry Assessment
Layers
ReinsuranceReinsurance
CEA CapitalCEA Capital
ReinsuranceReinsurance
Revenue BondsRevenue BondsRevenue BondsRevenue Bonds
Rate Reduction and Ability to Repay Debt
• S.886 would allow CEA to significantly reduce premium rates for EQ insurance
• CEA would retain (as capital) claim-paying capacity for 1-in-200 year event
• Probability of borrowing only .5% - 1%
• Debt to pay for mega-catastrophe would be repaid by modest premium increase imposed post-event
Current PolicyDwelling Coverage: $400,000Contents: $50,000Deductible: 15%* Damage to dwelling mustexceed $60,000 before any loss is covered Average Premium Today: $924
Homeowners SelectDwelling Coverage: $200,000Contents: $50,000Deductible: 15%
• Dwelling - $30,000• Contents - $7,500
Value for Consumers
*Deductible of 15% = $60,000
DwellingCoverage:$400,000*
DwellingCoverage:$400,000
(Restore full coverage)
Deductibles:Dwelling =
$30,000Contents =
$7,500
Homeowners Select PlusDwelling Coverage: $400,000Contents: $50,000Deductible:
• Dwelling - $30,000 (7.5%)• Contents - $7,500 (15%)
Note: All policies include $15,000 ‘Loss of Use’ coverage
Deductibles:Dwelling = $30,000Contents -=$7,500
DwellingCoverage:$200,000
(50% of full coverage)
Average Premium w/COGA: $500
Average Premium w/COGA: $516 Average Premium w/COGA: $639
CEA VISIONCEA VISIONMore (and smarter) policy choices for consumers
Lower premium rates
Lower deductibles
Increase number of Californians protected by EQ insurance
Maintain CEA financial strength—without asking other states to subsidize California’s risk
Decrease need for government assistance after major earthquake