State Audit Finds CEA Reinsurance Costs Reasonable

March 2, 2001

The California Earthquake Authority has made significant progress in reducing what it pays for reinsurance, according to a report by the California State Auditor released yesterday. The State Auditor concluded that “the authority’s reinsurance costs are high, but not unreasonable compared to what other companies are paying.”

he Auditor also noted the CEA has been successful in obtaining major reductions in reinsurance costs since its inception in 1996.”The authority has reduced its insurance costs by negotiating favorable contract terms and exercising contract options,” the Auditor stated.

“We are very pleased with the findings of this thorough audit,” said David Knowles, Chief Executive Officer of the CEA. “Reinsurance is a critical component of our ability to protect California homeowners against catastrophic earthquake losses. The State Auditor has concluded we have done a good job bringing down the cost of reinsurance, and this enabled us to pass on these savings to our policyholders.”

The report echoes an independent review of CEA financing by Tillinghast-Towers Perrin management consultants in July of last year. Both reports noted the unprecedented size of the CEA’s reinsurance purchases and the high costs of catastrophe insurance in general. The reports also credited the CEA with having made significant progress in reducing those costs.

The audit also examined the CEA’s State Assistance For Earthquake Retrofitting (SAFER) program and concluded it had successfully managed an unexpectedly large response to a pilot phase of the program in the San Francisco Bay Area. ” The CEA is required by law to provide mitigation services. In late 1999, the SAFER pilot program was launched in the Bay Area.

Interested homeowners were offered free engineering reports on their homes’ seismic strength, access to low-interest loans and referrals to specially trained contractors. The initial response to the program was overwhelming, with some 17,000 homeowners contacting the CEA for information.

Ultimately, more than 8,300 homeowners have received or will receive seismic engineering reports. All assessments will be completed by mid-May 2001. The audit noted that few of the homeowners had utilized SAFER loans and contractors to complete the recommended retrofits. However, the audit noted a CEA survey of program participants that indicated almost half of them took one or more of the steps recommended to improve their homes’ seismic strength.

Copies of the auditor’s report can be viewed at http://www.bsa.ca.gov/bsa/index.html. The report on the CEA is the first audit in the list of state auditor reports.

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