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