Calif. Earthquake Authority pushes for industry assessments

Negotiations are continuing in the California insurance industry, as the state’s Earthquake Authority (CEA) continues to seek a way to make up the $2.183 billion first industry assessment layer available to pay claims following a major earthquake. At its recent governing board meeting, held on June 26, the CEA emphasized the urgency to maintain its claims paying capacity. In the meantime, the CEA continues to search for a new CEO.

The Authority, a regional catastrophe pool, was formed amid market volatility after a spike in demand for earthquake coverage following the 1994 Northridge Earthquake led some insurers to stop writing new coverage. Member homeowner insurers sell CEA coverage, with claims being paid only when seismic damage to a home exceeds 10 or 15 percent of the dwelling’s replacement value. Insurers representing 70 percent of the state’s homeowners market provided the CEA’s initial $1 billion of capitalization. Legislation also authorized the Authority to assess member-insurers up to $3.6 billion to insure for a 600-year event.

However, the industry assessment layer is set to expire on Dec. 1, 2008, at which time the CEA will lose a large portion of its financial “layer cake” As of Jan. 1, 2007, the industry assessments gave the CEA claims paying capacity of $8.3 billion, according to its figures.

At the June meeting, representatives from the Association of California Insurance Companies, American Insurance Association and Personal Insurance Federation made statements that they would like to see the first industry assessment layer reduced after 2008. A representative from USAA insurance indicated that his company would prefer the first industry assessment layer be reduced to cover a 300-year event.

Sam Sorich, president of ACIC, said one of the problems between insurers and the CEA in negotiating a solution to maintain the Authority’s financial stability is “that exchange of ideas has been hamstrung by the inability of the CEA staff to go beyond the 600-year level, and also their inability to discuss, at least in concept, a post-event catastrophe mechanism.”

While Sorich said the CEA negotiators and member-insurers have had positive discussions thus far on finding a solution, “we are requesting the board to give a more flexible direction to the CEA staff, so these ideas can be worked on,” he said.

Sorich said the industry’s independent actuary have been asked to develop claims capacity scenarios for a 600-year earthquake event, a 300-year event and a 400-year event. While the insurance industry’s information is still be analyzed, he said to date, the CEA has not presented its own proposals involving those scenarios.

As another alternative, Rex Frazier, president of PIFC, said the Authority should consider post-event bonding, which he said would not cost any capital and could be repaid through a broad-based assessment. He also requested the CEA board entertain discussions on funding alternatives to a 600-year event.

“We’re not asking at this point for the board to adopt a change in the one-in-600 standard, or its position in respect to post-event bonding, but at least allow, at this point, the CEA staff to have those discussions with us,” Frazier said.

J. Clark Kelso, CEA chairman, indicated that it wasn’t the CEA governing board’s intent to “tie the hands” of its negotiators. He said CEA negotiators should not be limited in considering any solution, but noted that a post-event funding mechanism had been previously discussed. “I think anyone viewing our discussion would have come away with the sense that we were not enamored of that as a viable approach,” he said.

Danny Marshall, CEA general counsel, explained that a post-event funding mechanism was similar to Florida’s catastrophe model. “Florida is presently having a pretty unhappy experience with that model,” he said. Additionally, “Because of the low take-up rate of the CEA, this could very well be considered an assessment on policyholders, [which] could be considered a tax.”

California Commissioner Steve Poizner noted that consumers’ take-up rates for the earthquake insurance is worrisome. The California Department of Insurance estimates 11 to 12 percent of California households have earthquake insurance, which creates exposure for homeowners, and ultimately taxpayers.

Nevertheless, Poizner emphasized that despite the industry’s and CEA’s differences, that it is important to work with insurers who are responsible for selling the earthquake insurance policies.

“I don’t see the CEA being a healthy organization without the industry being enthusiastic about wanting to be a part of the CEA and selling the product aggressively,” he said. “Let me just remind everybody, we’re talking about 25 or 30 percent of our claims-paying capacity vanishing.”

Poizner said he believed in the short-term, the CEA has to find a way to deal with the expiration of the first industry assessment layer. In the long-term, the Authority needs to better address the needs of Californians for earthquake coverage, he added.

Kelso ultimately directed the CEA staff to continue negotiating the matter with insurers, with the goal of seeking legislation in 2007 that addresses the issue. All meeting attendees noted the time available to seek a legislative solution was limited, given how late it is in the current legislative session.

“It would be good to reach a resolution this year, however I don’t think we should rush to a decision that is not well-balanced and fair, and in the best interest of the CEA,” said Tim Richison, acting CEO and chief financial officer for the Authority.

The next CEA board meeting is scheduled for July 24.

In the meantime, Poizner indicated that the top candidates for a permanent CEO for the Authority should be presented to the board by August. The CEA has been searching for CEO since former leader Elaine Bush departed in March. Richison has been acting CEO since that time.