Calif. Earthquake Authority CEO Testifies In Support of Cat Insurance Bill

March 11, 2010

California Earthquake Authority CEO Glenn Pomeroy testified before the U.S. House of Representatives Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, in support of H.R. 2555 (specifically Title II), a bill that would provide a federal backup for states with catastrophe insurance funds.

According to Pomeroy, the bill would allow the CEA to lower its earthquake insurance rates and policy deductibles. “We believe that offering a more affordable earthquake insurance policy would help more Californians to insure their homes for potential earthquake damage,” Pomeroy testified. “By reducing costs, and as a result insuring more California homeowners, financial pressures also could be reduced for the federal government after the next big earthquake strikes.”

California is home to about two-thirds of the nation’s earthquake risk, with about 2,000 known faults throughout the state, yet only 12 percent of its homeowners with a fire policy also are covered for earthquake shake damage.

“With so much earthquake risk throughout the state, and with a majority of California’s large population areas near faults, any opportunity to insure more of its homeowners before the next big earthquake strikes requires urgent Congressional consideration,” Pomeroy said.

A study recently completed by the U.S. Geological Survey and other scientists reported more than a 99 percent probability that a 6.7 magnitude or greater earthquake, capable of causing extensive damage and loss-of-life, could strike California at any time within the next 30 years. The consequences for such a large uninsured population could be devastating following a large, damaging quake, he said.

If a 7.2 magnitude earthquake occurred on the Peninsula segment of the San Andreas fault (on the San Francisco Peninsula, running up through San Francisco), it’s estimated that residential losses could be approximately $55.1 billion. At current estimated take-up rates, however, only $4.1 billion of these losses would be covered by insurance, while $51 billion would be uninsured.

Title II of H.R. 2555 would allow the CEA to replace much of its current reliance on expensive reinsurance, with the certainty to access the private debt (bond) market, to the extent needed, Pomeroy said. All funds borrowed under a federal guarantee would be repaid over time by the CEA after a major event. Substantial savings from reducing the CEA’s reinsurance expenses would be passed through to consumers — reducing current CEA rates by about 35 percent, he added.

If H.R.2555 becomes law, CEA modeling indicates that the probability of borrowing funds would be between 0.5 and 1 percent, minimizing the need for a temporary premium increase necessary to repay any federally guaranteed debt, Pomeroy said. The CEA could pay all claims from any of the following earthquake-event scenarios, for example, without ever accessing the federal guarantee:

  • Repeat of the San Francisco 1906 earthquake (M 7.8). Projected CEA losses: $5-6 billion
  • Repeat of the 1989 “World Series Earthquake” (M 6.9). Projected CEA losses: $0.5 billion
  • Repeat of the 1994 Northridge earthquake (M 6.7). Projected CEA losses: $3.2 billion
  • 2008’s Great Southern California ShakeOut scenario (M 7.8). Projected CEA losses: $7 billion
  • Hayward Fault scenario (M 7.2). Projected CEA losses: $3.9 billion

The CEA’s Governing Board, with voting members consisting of the governor, state treasurer and insurance commissioner, voted unanimously on Nov. 16, 2009, to support the concepts embodied in H.R. 2555, and specifically endorsed the creation of a federal guarantee for natural-catastrophe post-event debt issued by qualified public entities.

The subcommittees met jointly to examine this legislation.

To read CEO Pomeroy’s congressional testimony, visit http://earthquakeauthority.com/index.aspx?id=104&pid=6.

Source: CEA

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