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AB-2927 California Earthquake Authority.(2017-2018)

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Date Published: 05/09/2018 09:00 PM
AB2927:v96#DOCUMENT

Amended  IN  Assembly  May 09, 2018
Amended  IN  Assembly  April 12, 2018
Amended  IN  Assembly  March 22, 2018

CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Assembly Bill No. 2927


Introduced by Assembly Member Nazarian

February 16, 2018


An act to amend Section 10089.29 of the Insurance Code, relating to insurance, and making an appropriation therefor.


LEGISLATIVE COUNSEL'S DIGEST


AB 2927, as amended, Nazarian. California Earthquake Authority.
Existing law establishes the California Earthquake Authority (CEA), administered under the authority of the Insurance Commissioner and governed by a 3-member board. Under existing law, the CEA is authorized to transact insurance in this state as necessary to sell policies of basic residential earthquake insurance. Existing law establishes a capital structure for the CEA, with several sources of financing. Existing law generally makes all moneys and invested assets held in the California Earthquake Authority Fund, subject to specified restrictions, “available capital,” which is the first source of financing used to pay earthquake claims and claim expenses. Under existing law, the California Earthquake Authority Fund is a continuously appropriated fund.
Existing law authorizes the Treasurer, as agent for the CEA, to sell investment grade revenue bonds or issue or secure other debt financing of the CEA in an amount up to $1,000,000,000 if the benefits paid following an earthquake event exhaust 4 specified sources of capital, including the CEA’s available capital and all insurer capital contributions and assessments. Existing law authorizes the CEA to surcharge all CEA policies policies, in a net amount not to exceed $1,000,000,000, plus costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit, to secure funds to repay the bonded indebtedness or other debt, and requires a CEA policy to include a specified notice of the surcharge to its policyholders.
This bill would revise that provision to require the CEA, with the Treasurer as its agent, to sell investment grade revenue bonds or issue or secure other debt financing in an amount up to $1,000,000,000, plus costs of issuance and sale of revenue bonds or other debt financing and amounts paid or payable to bond issuers and providers of credit support and letters of credit, if the 4 existing specified sources of capital plus risk transfer provided through capital market contracts are exhausted. By creating a new mandatory source of funding, the bill would make an appropriation.
This bill would permit clarify that the CEA to implement a surcharge for reinsurance coverage may use its existing surcharge authority to additionally repay costs of issuance and sale of revenue bonds or other debt, and amounts paid or payable to bond issuers and providers of credit support and letters of credit. The bill would amend the required notice of surcharge provided to policyholders to state that if a policyholder fails to cancel or nonrenew the CEA policy and fails to pay the CEA policy premium and surcharge for reinsurance by the payment deadline, both the CEA policy and the related policy of residential property insurance will be canceled. The bill would also make findings and declarations.
Vote: MAJORITY   Appropriation: YES   Fiscal Committee: YES   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 The Legislature finds and declares the following:
(a) The California Earthquake Authority (CEA) was duly established by Legislative acts in 1995 and 1996, acting as a public instrumentality of the State of California, to provide those California residential property insurance policyholders whose residential property insurance is provided by CEA participating insurance companies with access to insurance against damage from and losses caused by earthquakes, which damage and loss are typically excluded from coverage under residential property insurance policies.
(b) The CEA has successfully operated, and as of the date of this act, is entering in its 22nd year of operation.

(c)CEA grew its policyholder base and insured exposure over its first 19 years of operation at a consistent pace, but in recent years, CEA has seen those growth figures accelerate dramatically. That growth places new and unprecedented pressures on CEA’s insuring capacity, and because the CEA’s role remains important and integral to the interests of the state as the principal provider of residential earthquake insurance and earthquake-loss-mitigation activities, that capacity must be kept strong.

(d)CEA’s claim-paying capacity consists of its own available capital, traditional reinsurance available under contract, other risk transfer capacity available under contract, the capital realized from its issuance of bonds and reinsurance recoverables, and the power to collect assessments from its participating insurance companies at statutorily defined levels. Those assessment levels have diminished significantly and will continue to diminish significantly over time by operation of law.

(e)In addition to those segments of claim-paying capacity, CEA has the power under law, and under contract with its policyholders pursuant to the express terms of its issued insurance policies, to impose temporary premium surcharges of up to 20 percent of policyholders’ annual premium to generate up to $1 billion in additional funds to repay debt incurred after the occurrence of large earthquakes. The debt to be repaid consists of CEA-issued bonds or CEA-secured debt facilities, which provide capacity to pay claims and claim expenses arising from earthquakes. Despite its express and specific presence in the CEA statute since CEA’s inception, this statutorily conferred power to generate funds from policyholder premium surcharges to repay post-earthquake debt has been deemed, by agencies that assess CEA’s post-earthquake creditworthiness, as insufficiently certain of execution to constitute a suitable, ratable claim-paying capacity. It is essential that CEA’s existing power to surcharge its own policyholders, pursuant to law and to contract, be assured.

(f)As CEA’s policy sales have increased, CEA has had to increase its reliance on costly traditional reinsurance, and, based on the expense of that means of securing insuring capacity, explore increasing its rates.

(g)If CEA’s current annual growth pace continues, by 2022, CEA will require more than 26 billion dollars ($26,000,000,000) in total claim-paying capacity, of which 17 billion dollars ($17,000,000,000) would be from traditional and nontraditional risk transfer contracts at an estimated cost to CEA and its policyholders of more than 750 million dollars ($750,000,000) per year. The cost would then consistently increase from that expenditure level. Funds paid as premium on risk transfer contracts are irrecoverable and serve no purpose, other than to provide capacity for the term of the risk transfer procured.

(h)To assist CEA to provide policyholder-financed reinsurance to meet the capacity needs called for by the unprecedented increase in demand for CEA residential earthquake policies, while still maintaining the affordable insurance coverage for earthquake risk it has achieved and to pay claims for the benefit of its policyholders, the Legislature must strengthen and clarify CEA’s existing power to impose postearthquake surcharges on policyholders for reinsurance in a way that will ensure that policyholders maintain the benefit of their earthquake coverage.

(i)This act will do both of the following:

(1)Allow CEA to enhance its future claim-paying capacity to handle larger earthquakes by declaring and clarifying its governing board’s power and authority to impose surcharges on the premiums of CEA policyholders, for reinsurance under board-defined conditions and in board-defined ways.

(2)Provide an alternative reinsurance product to policyholders other than costly traditional reinsurance.

(c) The CEA’s claim-paying capacity consists of its own available capital, traditional reinsurance available under contract, other risk transfer capacity available under contract, the capital realized from its issuance of bonds and reinsurance recoverables, the power under law, and under contract with its policyholders pursuant to the express terms of its issued insurance policies, to impose temporary premium surcharges of up to 20 percent of annual premiums to repay certain debt obligations incurred by the CEA following an earthquake, and the power to levy and collect assessments from its participating insurance companies in statutorily defined amounts.
(d) Despite its express and specific presence in the CEA law and in CEA policies since the CEA’s inception, this statutorily conferred power to generate funds from policyholder premium surcharges to repay postearthquake debt has been regarded, by agencies that would assess the CEA’s postearthquake creditworthiness, as insufficiently certain of execution to constitute a suitable, ratable claim-paying capacity. Because it is essential that surcharge-supported postearthquake debt be recognized as suitable, ratable CEA claim-paying capacity, it is therefore imperative that the CEA’s existing power to surcharge its own policyholders, pursuant to law and to contract, be assured.
(e) In enacting this act, the Legislature seeks to strengthen and clarify the CEA’s existing power to impose postearthquake surcharges on policyholders in a way that will ensure that agencies that would rate the CEA’s credit would recognize the CEA’s policyholder surcharge supported debt as a defined, fully authorized, ineluctable portion of the CEA’s claim-paying capacity.

SEC. 2.

 Section 10089.29 of the Insurance Code is amended to read:

10089.29.
 (a) (1) Notwithstanding Section 10089.10, the authority shall sell investment grade revenue bonds, issue sell, issue, or secure other debt financing of the authority, or sell, issue, or secure a combination of revenue bonds and debt financing, in an amount determined by the board pursuant to Section 10089.32, but not to exceed one billion dollars ($1,000,000,000) plus costs of issuance and sale of those revenue bonds or other debt financing, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, if claims and claim expenses incurred by the authority from an earthquake event exhaust the total of the following:
(A) The authority’s available capital.
(B) The maximum amount of all participating insurer capital contributions and assessments pursuant to Sections 10089.15 and 10089.23.
(C) All reinsurance and risk transfer provided through capital market contracts actually available and under contract to the authority.
(D) All capital committed and actually under contract to the authority from private capital markets.
(2) The Treasurer shall act as agent for sale of those revenue bonds, and shall make available the net proceeds of the revenue bonds or debt financing as funding for the authority. Failure of the authority to sell those revenue bonds or obtain that debt funding for any reason shall not obligate the State of California to provide or arrange replacement funding for the authority. The Treasurer may sell revenue bonds for the purpose of refunding the revenue bonds or other debt financing when authorized to do so by the board, and the surcharge for reinsurance paid by policyholders as authorized by this section may be used to repay that refunding, plus costs of issuance and sale of those revenue bonds or other debt financing being refunded, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt being refunded.
(b) (1) In the event of a revenue bond sale or debt financing arrangement pursuant to this section, the authority shall have the power annually to surcharge, as a form of reinsurance, surcharge all authority policies to secure funds, which the authority shall may use solely to repay the bonded indebtedness or other debt, plus costs of issuance and sale of those revenue bonds or other debt, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt. Notwithstanding Section 10089.23, the net surcharge for reinsurance collected shall not exceed one billion dollars ($1,000,000,000), plus costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt. The surcharge for reinsurance on an authority policy shall not exceed 20 percent of the annual basic residential earthquake insurance premium in any one year for the policy. A surcharge for reinsurance authorized pursuant to this section shall not be considered premium for purposes of the calculation of rates filed with the commissioner pursuant to Chapter 9 (commencing with Section 1850.4) of Part 2 of Division 1 or the calculation of producer commission.
(2) If a policy issued by the authority includes the a premium surcharge for reinsurance pursuant to this subdivision, the participating insurer shall provide the insured a notice in a stand-alone document stating that the policyholder may cancel or nonrenew the earthquake policy. The notice shall specify that cancellation or nonrenewal of the earthquake policy will not affect the underlying residential property insurance policy. The statement shall be provided with the premium billing and shall include the following statement in 14-point boldface type:

NOTICE OF SURCHARGE ON CEA EARTHQUAKE INSURANCE POLICY AND RIGHT TO CANCEL

THE CEA IS IMPOSING A SURCHARGE ON THE PREMIUM OF ALL CEA EARTHQUAKE INSURANCE POLICIES. You may choose to renew, to cancel, or not to renew (“nonrenew”) your CEA earthquake insurance policy. If you choose to cancel or nonrenew your CEA earthquake insurance policy, your CEA earthquake insurance policy will be canceled and that cancellation will have no effect on your policy of residential property insurance. If you fail to cancel or to nonrenew your CEA earthquake insurance policy, and if you also fail to pay the CEA earthquake insurance policy premium and surcharge by the payment deadline, both your CEA earthquake insurance policy and your policy of residential property insurance will be canceled. IF YOU WANT EARTHQUAKE INSURANCE PROVIDED BY THE CEA, YOU MUST PAY THE PREMIUM FOR THE CEA EARTHQUAKE INSURANCE POLICY AND THE SURCHARGE.

(c) The total amount of indebtedness and policy surcharges for reinsurance authorized under this section shall not exceed one billion dollars ($1,000,000,000) plus costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, regardless of the frequency or severity of earthquake losses after the creation of the authority. Once the authority has levied policy surcharges in an amount no more than one billion dollars ($1,000,000,000) plus costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, the authority’s power to surcharge policies shall cease and the authority shall be prohibited from levying additional surcharges pursuant to this section.
(d) Consistent with Section 676, the authority shall cancel the policy of basic residential earthquake insurance if the policyholder fails to pay the earthquake policy surcharge authorized by the authority, and the insurer shall cancel the policy of residential property insurance if the policyholder fails to pay the policy surcharge authorized by the authority.