Earthquake Insurance for California Renters

1
Earthquake Insurance for California Renters
Homeowners

• Presented to the
• Bay Area Earthquake Alliance
• Daniel P. Marshall, III
• General Counsel
• California Earthquake Authority

2
The Big Picture

• The economic risks of natural catastrophes have
  become increasingly evident over the last 1520
  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

20082009 Storms Gustav, Ike Global Financial
Meltdown (BB)
2004 Four Storms (Charley, Ivan, Frances,
Jeanne) (18 B)
2005 Four Storms (Dennis, Katrina, Rita,
Wilma) (58 B)
1992 Andrew (15.5 B)
2001 WTC (18.8 B)
1994 Northridge (12.5 B)
3
One Result

• 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.

4
The Missing Link

• The 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

5
One Approach S.886

• What 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

6
A Case Study The CEA
7
CEA Background

• 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

8
Take-up Rate CA Residential EQ Insurance
36
26
CEA
12
12
9
9
California Earthquake Authority1997-2008
Reinsurance Companies
Policyholders
CEA
Total Policyholder Premiums Collected 5.4B
Total Reinsurance Premium Paid 2.3B
CEA Capital 2.1B
Reinsurance Recoveries 250,000
Expenses 1.0B
10
California Earthquake Authority Financial
Structure
Current Financial Structure Total 9.5B
(Capacity 1-in-545 year)
A More Efficient Approach
Industry Assessment Layers
Post-Event Borrowing
2.8B
Reinsurance (200 M/year)
Industry Assessment Layers
3.1B
0.3B
Revenue Bonds
Revenue Bonds
CEA Capital
CEA Capital
3.3B
11
California Earthquake Authority Financial
Structure Alternative Approaches
Post-Event Borrowing
Post-Event Borrowing
Post-Event Borrowing
Industry Assessment Layers
Industry Assessment Layers
Industry Assessment Layers
Post-Event Borrowing
Revenue Bonds
Revenue Bonds
Revenue Bonds
Reinsurance
Reinsurance
Reinsurance
CEA Capital
CEA Capital
CEA Capital
Capacity in each case 1-in-500 Year
12
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

13
Value for Consumers
Dwelling Coverage 400,000
Dwelling Coverage 400,000 (Restore full
coverage)
Deductibles Dwelling 30,000 Contents 7,500
Dwelling Coverage 200,000 (50 of full coverage)
Deductible of 15 60,000
Deductibles Dwelling 30,000 Contents -7,500
Current Policy Dwelling Coverage
400,000 Contents 50,000 Deductible 15
Damage to dwelling must exceed 60,000 before any
loss is covered Average Premium Today 924

• Homeowners Select Plus
• Dwelling Coverage 400,000
• Contents 50,000
• Deductible
• Dwelling - 30,000 (7.5)
• Contents - 7,500 (15)

• Homeowners Select
• Dwelling Coverage 200,000
• Contents 50,000
• Deductible 15
• Dwelling - 30,000
• Contents - 7,500

Average Premium w/COGA 639
Average Premium w/COGA 516
Average Premium w/COGA 500
Note All policies include 15,000 Loss of Use
coverage
14
CEA VISION

• More (and smarter) policy choices for consumers
• Lower premium rates
• Lower deductibles
• Increase number of Californians protected by EQ
  insurance
• Maintain CEA financial strengthwithout asking
  other states to subsidize Californias risk
• Decrease need for government assistance after
  major earthquake