A new report completed by Tillinghast-Towers Perrin presents the current state of the California Earthquake Authority (CEA) in a positive light.
The “CEA Project Consulting Team Report,” was commissioned by the CEA Governing Board to analyze the entity’s current structure and operations and recommend changes. The goals include: “strengthening the financial structure, survivability and sustainability of the CEA; protecting the CEA against adverse selection; making earthquake insurance widely available; [and] optimizing the CEA’s Governing Board and staff structure.”
Since its inception, the main focus of the CEA has been on having “sufficient claims-paying capacity to provide protection to its policyholders for the worst case scenario, a significant earthquake,” according to the report. “The CEA is currently well-positioned in this regard, with an estimated current capacity to handle on an aggregate basis a 1 in 1,000-year loss. In other words, for the current policyholders there is less than a 0.1% probability of a CEA default.
“The long-term sustainability of the CEA is a key issue for the CEA at this juncture. A significant earthquake event or series of smaller events could impact the ability of the CEA to acquire additional capacity to continue. The key to maintaining sufficient capacity for the long term is to examine and evaluate alternatives to the current financial structure that enhance and protect its current capital base, grow that capital base at a faster rate over time, and provide additional sources of capacity on either a pre-event, or contingent post-event funding basis.”
Commenting on the report, Dan Dunmoyer, president of the PIFC, noted that the survivability of the CEA has improved since the last Tillinghast report, due largely to successful management of cost and risks.
However, Dunmoyer warned against proposed changes to the CEA that would increase the cost or limit the availability of homeowners insurance in California. Dunmoyer suggested that any alternatives that suggest rearranging the financial structure of the CEA should be prudently reviewed, because if the CEA loses its IRS tax exemption, it would have a negative effect on the remaining financial structure of the organization, possibly leading to financial collapse.
Dunmoyer added that participating insurance companies are currently liable for the second and sixth layers in the financial structure of the CEA, and these liabilities are committed to the CEA in the combined amount of more than $3 billion. The participating companies sell CEA earthquake policies but do not keep any of the premium. The companies cover their CEA risks by either reserving the dollars from their surplus or paying for reinsurance to cover the amount for which they are liable in the second and sixth CEA financial layers.
Dunmoyer also explained the negative consequences of increasing assessments on participating insurers in the CEA. He stated that if the participating insurers in the CEA are asked to raise their assessments above the current amounts, the companies will have no choice but to go to the private reinsurance markets to purchase the additional assessments and such purchases will lead to higher homeowners insurance costs.
If, on the other hand, the participating insurers choose to apply the additional assessments to their surplus, it may force them to shrink the amount of homeowners policies they can sell. This could potentially lead to a homeowners shortage similar to the one faced by the state in 1994 and 1995.
It was also noted that the CEA has a capacity to pay more than $7.2 billion in residential earthquake claims, which Dunmoyer cited as the reason for California’s strong homeowners and earthquake insurance marketplace. He added that it would be irresponsible to propose any changes that could jeopardize the homeowners market or increase the cost of homeowners insurance.
The CEA is a privately funded, publicly managed entity that provides earthquake coverage to approximately 830,000 California residential property owners. PIFC member insurance companies write over 50 percent of the CEA’s Business.
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