Earthquake Insurance for California Renters & Homeowners

1. Earthquake Insurance for California Renters & Homeowners Presented to the Bay Area Earthquake Alliance Daniel P. Marshall, III General Counsel California Earthquake Authority

2. The Big Picture • 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 2008–2009 Storms: Gustav, Ike; Global Financial Meltdown ($BB) 2004 Four Storms (Charley, Ivan, Frances, Jeanne) ($18 B) 2005 Four Storms (Dennis, Katrina, Rita, Wilma) ($58 B) 1992 Andrew ($15.5 B) 1994 Northridge ($12.5 B) 2001 WTC ($18.8 B)

3. One Result • 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.

4. The 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 The Missing Link

5. One Approach – S.886 • What 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

6. A Case Study: The CEA

7. CEA Background • 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

8. 36% 26% CEA 12% 12% Northridge 9% Take-up Rate: CA Residential EQ Insurance

9. Reinsurance Companies Policyholders CEA Total Policyholder Premiums Collected $5.4B Total Reinsurance Premium Paid $2.3B CEA Capital $2.1B Reinsurance Recoveries $250,000 California Earthquake Authority1997-2008 Expenses * $1.0B

10. California Earthquake Authority Financial Structure Current Financial Structure Total = $9.5B (Capacity 1-in-545 year) A More Efficient Approach Industry Assessment Layers Post-Event Borrowing $2.8B Reinsurance ($200 M/year) Industry Assessment Layers $3.1B $0.3B Revenue Bonds Revenue Bonds CEA Capital CEA Capital $3.3B

11. California Earthquake Authority Financial Structure: Alternative Approaches Post-Event Borrowing Post-Event Borrowing Industry Assessment Layers Post-Event Borrowing Industry Assessment Layers Industry Assessment Layers Post-Event Borrowing Revenue Bonds Revenue Bonds Revenue Bonds Reinsurance Reinsurance Reinsurance CEA Capital CEA Capital CEA Capital Capacity in each case: 1-in-500 Year

12. 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

13. Value for Consumers Dwelling Coverage: $400,000* Dwelling Coverage: $400,000 (Restore full coverage) Deductibles: Dwelling = $30,000 Contents = $7,500 Dwelling Coverage: $200,000 (50% of full coverage) *Deductible of 15% = $60,000 Deductibles: Dwelling = $30,000 Contents -=$7,500 Current Policy Dwelling Coverage: $400,000 Contents: $50,000 Deductible: 15% * Damage to dwelling must exceed $60,000 before any loss is covered Average Premium Today: $924 • Homeowners Select Plus • Dwelling Coverage: $400,000 • Contents: $50,000 • Deductible: • Dwelling - $30,000 (7.5%) • Contents - $7,500 (15%) • Homeowners Select • Dwelling Coverage: $200,000 • Contents: $50,000 • Deductible: 15% • Dwelling - $30,000 • Contents - $7,500 Average Premium w/COGA: $639 Average Premium w/COGA: $516 Average Premium w/COGA: $500 Note: All policies include $15,000 ‘Loss of Use’ coverage

14. More (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 CEA VISION