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September 2005

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Rate Filings Submitted to Department of Insurance
CEA Governing Board Approves Proposed 22.1 % Rate Decrease

The CEA Governing Board moved a step closer to lowering the cost of earthquake insurance for most of our policyholders, as it approved an application for a statewide average 22.1 percent decrease in rates. After being briefed in its August 25th meeting on the results of the CEA’s exhaustive scientific, engineering, and actuarial review of its ratemaking process and the EQECAT-CEA earthquake model, the Board approved three proposed rate filings submitted by CEA staff.

The rate filings were then sent immediately to the California Department of Insurance’s Rate Filing Bureau in San Francisco, arriving on August 31, 2005, where it began a thorough regulatory review by the Insurance Commissioner and Department staff.

The Governor and State Treasurer voted to support the rate-reduction proposal, while the Insurance Commissioner abstained from voting, having earlier indicated in a statement that because of his dual role as CEA Board member and regulator, he preferred not to vote unless his vote was needed to break a tie and send the proposal forward to his department.

During the meeting, the Board learned that the proposed rate reduction was solidly supported by the best available scientific information, as is required of CEA rates by law. But in addition to incorporating the newest earthquake science, the CEA had also seen an expense drop: A dramatic lowering of annual reinsurance costs—to less than $100 million today from the 1998 high of almost $300 million—very much contributed to the CEA’s ability to offer a rate reduction.

In the background of the Board’s rate discussion was the sunset (by law) of the so-called First Industry Assessment Layer on December 1, 2008—that layer now provides the CEA over $2 billion in claim-paying capacity. CEA staff is analyzing suggestions about CEA’s future financial structure that were gathered at two recent public meetings, and later this year, analyses by staff and other, outside experts will be submitted to the Board.

From its perspective last month, however, Board members acknowledged the unpredictability of future financial and insurance markets but resolved to take all actions necessary to keep the CEA on a firm financial footing while recommending lower CEA rates for the great majority of CEA policyholders.

The Board also sent the Commissioner two new product enhancements for review, each in a separate rate application:

  • Personal Property and Loss of Use Limits. If approved, this enhancement would "un-bundle" the existing Personal Property and Loss of Use increased-limits packages, allowing policyholders more flexibility in buying the popular increased-limits coverages.
  • Additional Building-Code Upgrade Coverage. If approved, this enhancement would give an option to buy an additional $10,000 of Building Code Upgrade coverage; coupled with base-limits provisions for code upgrade, policyholders would have a total of $20,000 of this important coverage.

The last CEA rate change was in 1999. Expressing its desire to move quickly now to adjust CEA rates, the Board resolved to seek the rate reduction in ample time to allow the CEA to implement the changes across all CEA participating insurers no later than July 1, 2006.

The Board’s action brought expressions of strong support from consumer groups and over three dozen media inquiries from around the state.

CEA Board Hears of Florida’s Approach to Catastrophe Insurance

Terrible, damaging windstorms are nothing new in the South—in fact, they are annual tragic occurrences with examples that will stay with us forever. Hurricane Andrew in 1994 brought a then-historic level of damages and human suffering, only to be wholly eclipsed by the almost incalculable toll of Hurricane Katrina in just the past few weeks.

To deal with the financial impacts of the enormous wind-related destruction of property, Florida has had in place for a number of years, government-created programs to supplement what the private insurance and reinsurance markets cannot or will not do—provide low-cost, post-event-financed reinsurance and write primary insurance in the highest-risk (generally, coastal) areas of the state.

Florida’s approach to providing access to natural-catastrophe insurance was described by USAA Chief Actuary and CEA Advisory Panel member Alice Gannon in a presentation to the CEA Governing Board on August 25th. Ms. Gannon was generously responding to the Board’s request for her insights into Florida’s programs, as the Board continues its efforts to look at risk-financing methods used by public entities other than the CEA.

According to Ms. Gannon, the Florida legislature responded to Andrew’s $15 billion insured loss, which had caused multiple insurer insolvencies and rate increases for homeowners and businesses of up to 300 percent, by creating the Florida Hurricane Catastrophe Fund (FHCF). In addition, the legislature combined two existing programs to create the Citizens Property Insurance Corporation (CPIC). FHCF and CPIC are the public entities that today address, in different ways, Florida’s natural-catastrophe insurance challenges.

  • Like the CEA, the FHCF is exempt from federal taxes and publicly managed, but instead of primary insurance, FHCF sells catastrophic reinsurance to all residential property insurers that operate in Florida, including the CPIC-participation is mandatory for all of Florida’s residential property insurers. The program has $43 billion of multi-year capacity (limited, however, to $15 billion per year) and is financed by premiums (which are set lower than market), investment earnings, and post-event assessments on primary insurers of almost all property and casualty lines of insurance. Insurer-assessment amounts are passed on to policyholders, a process that results in very broad-based-assessment financing occurring entirely post-event.
  • Like the CEA, CPIC is a primary insurer of personal residential risks, but very much unlike the CEA, CPIC is an "insurer of last resort" that is required to offer policies in high-risk areas to hundreds of thousands of consumers who couldn’t otherwise be insured. The organization is exempt from federal income tax and, like an insurance company, issues its own policies and pays claims. CPIC is financed by policyholder premiums, funds from placement of "pre-event" notes, a line of credit, reinsurance from the FHCF, and an ability by law to assess property insurers, which in turn are authorized to pass assessment liabilities through to policyholders.

Ms. Gannon told the Board that the primary difference between the two states’ approaches is that in Florida, the greater burden is placed on future policyholders, through the post-event assessment mechanisms, while in California the cost of risk-financing is borne and largely paid up front by current policyholders. For example, to cover much higher than anticipated claims from the 2004 hurricane season, CPIC is expected to impose a 6.8 percent assessment on all Florida property policyholders. And in the case of an even worse hurricane season this year, both FCHF and CPIC could again assess all policyholders, and in the most extreme case, assessments could last for many years.

To generalize about a complex subject, if there is an "advantage" to the Florida approach it is that virtually all residential property owners are insured for hurricane wind damage. In California, on the other hand, earthquake insurance is not required by law or lenders, and most homeowners do not buy earthquake insurance. Cost of coverage is a factor in this lack of protection for many Californians.

CEA to Sponsor Earthquake-Preparedness Messages During Remembrance of the Great l906 San Francisco Earthquake

The CEA Board voted in August to continue CEA support of a significant public-education campaign that builds on centennial activities both this year and next to commemorate the Great 1906 San Francisco Earthquake, all serving to remind Californians that, Every day is earthquake season in California.®

CEA’s ongoing public education and mitigation campaign will be augmented with increased print and electronic media messages. Much of the campaign will focus on the 1906 Centennial, highlighted by a 26-week advertising program placed with the SF Bay Area’s KGO-AM radio. Specially produced CEA-sponsored earthquake awareness and preparedness messages will run on KGO from October (the month of 1989’s Loma Prieta earthquake) to April (the 1906 centennial). The KGO radio spots will be preceded by KPIX-TV’s documentary on the new science that is expanding our understanding of recent earthquake activity—CEA provided support for the one-hour documentary, scheduled to air September 10th.

Putting Down Roots Graphic

CEA will also fund an increased print run for the San Francisco edition of the highly successful CEA-supported booklet, Putting Down Roots in Earthquake Country. Through the efforts of and support by the CEA, the Red Cross and the United States Geological Survey, 500,000 copies of the booklet will be delivered to San Francisco Chronicle readers on September 18th as an insert in their Sunday papers. The longer-term goal is to distribute a total of one million booklets with the assistance of the Chronicle, the San Jose Mercury News, and the Contra Costa Times.

The Board has also supported a goal to fund a Putting Down Roots, Cascadia Edition, which is now under active discussion (Cascadia describes the offshore and onshore coastal region of California, north of San Francisco). Humboldt County newspapers are said to be available to distribute 100,000 such booklets.

CEA continues to build respect as an active member of earthquake awareness and mitigation projects throughout the state, always seeking to leverage its efforts and funds by exercising leadership and encouraging broad, meaningful cooperation.

Preparing the CEA for 2008

The Governing Board remains committed to the CEA’s financial and structural soundness and at its meeting in August, renewed its commitment to staff’s research and analysis project that seeks to assist the Board in planning for a sound financial future.

Continuing its focus on the 2008 "sunset" of the law that mandates participating-insurer responsibility for some $2.183 billion in CEA financing, the Board listened with interest as staff reported on the two public meetings the CEA held on the CEA’s Financial Structure Capacity Beyond 2008. In April 2005, the Board accepted a CEA staff suggestion for obtaining public input on how CEA can "maximize the CEA’s ability to pay 100% of covered claims at any given time while maintaining sufficient resources to continue as a viable entity"-the result was the public meetings in Los Angeles and San Francisco. Suggestions from the meetings are under evaluation now, with research, analysis, and white papers to follow in Board reports later this year.

The Board last month accepted and approved staff’s suggested criteria to apply to the long list of the public’s suggestions, to select and focus on the most relevant, innovative, and helpful. As a result, staff is now directed to perform additional work on those suggestions that, in staff’s view, are most reasonably calculated to:

• increase CEA revenues, or
• decrease CEA expenses before a major earthquake, or
• decrease CEA expenses after a major earthquake.

To further examine avenues of potential CEA revenue enhancement, the Board received testimony on the CEA’s current investments and investment strategy. The CEA earned $46.4 million last year on an average invested portfolio of some $2.170 billion, following a “conservative and safe” investment portfolio, according to Metropolitan West Securities (MetWest). This performance equaled a 2.17 percent return on investment, with zero anticipation of portfolio losses if investments are held to maturity.

MetWest, Voyageur Asset Management, and Cypress Asset Management are the managers of the CEA’s investment portfolios.

2005 CEA Board & Advisory Panel Meeting Schedules

CEA Governing Board
Unless otherwise noted, all CEA Governing Board meetings are on Thursdays and begin at 1:00 p.m.

  •  November 17
  •  December 15

CEA Advisory Panel
Unless otherwise noted, all CEA Advisory Panel meetings
are on Thursdays and begin at 10:30 a.m.

  •  September 22
  •  October 27




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