BILL NUMBER: AJR 6	INTRODUCED
	BILL TEXT


INTRODUCED BY   Assembly Member Cooley

                        FEBRUARY 24, 2015

   Relative to earthquake insurance.


	LEGISLATIVE COUNSEL'S DIGEST


   AJR 6, as introduced, Cooley. California Earthquake Authority:
postearthquake financing.
   This measure would recognize a need for federal legislation that
would establish guarantees of postearthquake financing for
prequalified, actuarially sound state earthquake insurance programs,
including the California Earthquake Authority, and would urge the
President and Congress of the United States to enact that
legislation.
   Fiscal committee: no.



   WHEREAS, Over the last 30 years, California has experienced 1,451
earthquakes of magnitude 4.0 or greater, ranging from 16 to 168 per
year; and
   WHEREAS, Most Californians live within 20 miles of a major
earthquake fault capable of producing damaging earthquakes; and
   WHEREAS, On the morning of August 24, 2014, many residents of Napa
discovered they lived closer to such a fault than they believed. A
magnitude 6.0 earthquake struck American Canyon, south of Napa, at
3:20 a.m., leading to one death and many injuries. The earthquake
seriously damaged nearly 100 homes, as well as many historic downtown
buildings. It cost local wineries millions of dollars in spilled
wine and damaged equipment, and numerous people were injured. The
overall damage and effects of the earthquake demonstrated how even a
moderate-sized earthquake can have a large impact on a community; and

   WHEREAS, In June 2014, the Los Angeles Times reported that the
first five months of the year were marked by five earthquakes larger
than magnitude 4.0, after what had been a relatively quiet period of
seismic activity for the Los Angeles area. That number of earthquakes
at that magnitude had not occurred in a year since 1994, the year of
the Northridge earthquake; and
   WHEREAS, Faced with the certainty of its peril from earthquakes,
over the last three decades California has repeatedly shown that
smart public policy choices can help Californians prepare for a
catastrophic earthquake. Milestone innovations across this era
include the following:
   (a) In the year following the 1983 Coalinga earthquake, California
passed the Earthquake Insurance Act, requiring residential property
insurers to offer homeowners earthquake coverage, to ensure
homeowners considered the possibility of protecting their home from
earthquake damage.
   (b) In the year after the 1989 Loma Prieta earthquake, California
began examining how a state-based financial pool might be constructed
to improve protection for homeowners. This effort, the California
Residential Earthquake Recovery Fund (CRERF), was intended to cover
the cost of earthquake insurance deductibles. While this plan was
repealed in 1992 as potentially actuarially unsound, it pointed the
way to further innovations.
   (c) Since 1996, the multipart funding mechanism of the California
Earthquake Authority (CEA), a public instrumentality of the State of
California, has succeeded as the primary source of earthquake
insurance for California homeowners seeking to protect their homes
from earthquakes; and
   WHEREAS, Despite the growing successes of the CEA since its 1996
formation, how it can be improved has become clear. Almost every news
story about California earthquake insurance and the CEA notes that
residential earthquake insurance is costly for homeowners and the
deductibles are high. The high cost and high deductibles are seen as
a key factor behind why only 12 percent of Californians who buy
homeowners' insurance also buy earthquake insurance; and
   WHEREAS, There is no better way to prepare California for the
inevitability of disastrous earthquakes than to make earthquake
insurance work better for its residents. The limitations of the
existing system are well-known. Now is the time for the next key step
in policy innovation to make the state's earthquake insurance system
work better for renters and homeowners; and
   WHEREAS, As the CEA approaches two decades of operation, it has
become clear that the CEA has pushed the envelope on how a single
state-based pool can materially assist in catastrophe readiness. But
by law, the CEA's rates must be actuarially sound and based on the
best available scientific information for assessing earthquake
frequency, severity, and loss; these sensible conditions also temper
the CEA's ability to cut the cost of earthquake insurance; and
   WHEREAS, As a public instrumentality of the state, the CEA must
cover all its risks, including the possibility that at any time, a
truly catastrophic earthquake might hit the state; and
   WHEREAS, The CEA's need, as a stand-alone, risk-bearing public
instrumentality of the state, to always have a plan to cover the
chance of a catastrophic earthquake is what, under the current
system, keeps the price of earthquake insurance high. For the level
of total exposure the policies represent, the rates yield sufficient
premiums to pay for a backstop of reinsurance sufficient to offset
expected CEA losses in all but the most catastrophic earthquake; and
   WHEREAS, A federal policy of certain access to federal debt
guarantees for postevent financing would strengthen the risk-bearing
capacity of actuarially sound state-based disaster programs like the
CEA and reduce the preevent expense of providing that insurance. In
recent sessions of the United States Congress, a proposed federal
partnership limited to prequalified, actuarially sound state
earthquake insurance programs has been estimated to expose the
federal government to a 10-year cost of only $25 million; and
   WHEREAS, A state and federal partnership to enhance the ability of
prequalified, actuarially sound state earthquake funds to access
postdisaster borrowing would enable California and other states using
actuarially sound programs to manage risk with a dramatically better
tool; and
   WHEREAS, The CEA's certain access to a federal guarantee of its
postearthquake borrowing would ensure access to the private capital
markets at reasonable rates, enhancing the claims-paying capacity for
a catastrophic earthquake. That lower-cost capacity, in turn, would
permit the CEA to adjust its annual purchase of earthquake
reinsurance and lower expenses, thus speeding long-term capital
accumulation to help CEA modulate its cost of providing basic
earthquake insurance across the state; now, therefore, be it
   Resolved by the Assembly and the Senate of the State of
California, jointly, That the Legislature urges the President and the
Congress of the United States to enact legislation to establish
guarantees by the federal government to support the responsible sale
of postearthquake bonds by financially sound
residential-earthquake-insurance programs operated by any of the
several states on an actuarially sound basis; and be it further
   Resolved, That the Chief Clerk of the Assembly transmit copies of
this resolution to the President and Vice President of the United
States, to the Speaker of the House of Representatives, to the
Majority Leader of the Senate, and to each Senator and Representative
from the State of California in the Congress of the United States.