Thursday, January 25, 2018 10:00 a.m.
Chief Executive Officer, CEA
More Californians need earthquake insurance There are 14 Million housing units* in California. Only 9% have earthquake insurance – most through the CEA. Uninsured Scientists say there is a 99.3% CEA probability of M6.7 earthquake Non CEA or greater occurring within the next 30 years. Residential losses from a major earthquake could be greater than $100B – almost all of which would be uninsured. *including houses, mobilehomes, condo units, rental units 1/23/2018 4
CEA offers The Strength to Rebuild for CEA policyholders CEA maintains a very safe CEA pays claims 2018 “from the bottom level of claim-paying up” of the tower capacity: only once in 400 years would earthquakes IAL $1.7B exhaust CEA resources. Order of Claim-Payment Resources Bond Proceeds $700M Annual probability of 1-in- • 400 years or just one quarter of one percent. Estimated CEA loss if historical events reoccur: If any of the most Reinsurance damaging earthquakes in $9.2B California history were to 1906 San Francisco: $9B reoccur today, CEA would pay covered losses with 1994 Northridge: $6B capacity to spare. But statewide, total Capital uninsured residential $5.7B losses will be more than 1989 Loma Prieta: $1B 10X greater than CEA- policyholders’ losses . $17.3B 1/23/2018 5
CEA depends heavily on reinsurance 2018 IAL (Industry Assessment Layer): $18 B Post-event assessments — if • needed, would be paid by CEA IAL participating insurers. $1.7B $16 B Bond Proceeds: Bond Proceeds $700M CEA has become one of the largest Proceeds realized through sale of • $14 B CEA’s (pre -event) revenue bonds, buyers of reinsurance in the world. already issued. $12 B Reinsurance: Since inception in 1996: Reinsurance is basically • Reinsurance insurance for insurance $10.9B: Total CEA policyholder premium $10 B $9.2B companies. CEA purchases from • $4.3B: Total CEA reinsurance premium reinsurance companies around the world, and through global $8 B $250,000: Total of reinsurance proceeds capital markets . received by CEA Capital: $6 B Money held in conservative • investments and available to pay claims. $4 B CEA participating insurers • Capital made initial capital contributions $5.7B totaling $800M. $2 B The remaining $5B represents • accumulated CEA policyholder premium and investment income . 0 $17.3B 1/23/2018 6
More Californians are choosing CEA. New and unprecedented CEA policy growth: CEA has developed affordable and flexible insurance options and is now experiencing unprecedented growth: 1,050,000 2006 – 2015 average annual increase: 6,700 policies 1,021,707 2016 increase: 52,000 policies 1,000,000 2017 increase: 90,707 policies 950,000 931,589 900,000 879,540 865,084 841,503 841,836 850,000 800,930 811,317 820,932 800,000 775,464 779,362 754,672 750,000 700,000 * 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Organic New Participating Insurers *Final numbers as of Jan. 24 1/23/2018 7
CEA’s annual reinsurance expense is rising dramatically. If the upward trend continues, CEA will be forced to raise policyholder rates significantly, every year. $30.0 $26.0 $1.3 $25.0 $23.5 $0.7 $1.5 $21.3 $0.7 $19.2 $1.7 $20.0 $0.7 $17.3 $1.7 (in $ billions) $0.7 $15.3 $1.7 $0.7 $15.0 $17.7 $13.3 $1.7 $15.1 $0.7 $11.7 $11.2 $1.8 $12.9 $11.0 $9.9 $0.7 $1.9 $9.3 $10.0 $2.0 $0.7 $7.5 $2.0 $0.7 $5.5 $0.3 $4.1 $3.8 $3.1 $5.0 $6.3 $6.2 $6.0 $5.8 $5.6 $5.3 $5.4 $5.0 $4.7 $4.5 $- 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Policyholders 841,836 865,084 879,540 931,589 1,021,707 1,091,707 1,161,707 1,231,707 1,301,707 1,371,707 Reinsurance $213M $194M $189M $202M $315M $395M $467M $548M $642M $752M Expense CEA Available Capital Risk Transfer Revenue Bonds Industry Assessment 1/23/2018 8
Replacing a portion of reinsurance with potential post-event assessment: 2018 Solution $18 B All Property and Casualty Policyholder Assessment IAL $1.7B $16 B • No more than 1% of premium, in the aggregate – may Bond Proceeds $700M Property & increase with exposure growth, IAL Casualty $14 B using an index formula. $1.7B Assessment $4.7B • Actual assessment apportioned according to relative EQ risk. $12 B • Annual probability CEA Assessment $430M of assessment: 0.56% Reinsurance $10 B Bond Proceeds $700M $9.2B 1-in-178 chance of occurring $8 B Reinsurance CEA Policyholder Assessment $4.1B • No more than 10% of premium $6 B • Annual probability of assessment: 0.6% 1-in-164 chance of occurring $4 B Capital Capital $5.7B $5.7B $2 B 0 $17.3B $17.3B 1/23/2018 9
Benefits: Earthquake insurance would remain available for all Californians and funding for natural-catastrophe resiliency would rise. $18 B CEA would spend $25M CEA would double the amount it annually for earthquake-loss reinvests in its claim-paying mitigation and natural- capability. $16 B catastrophe resiliency projects. Property & IAL Casualty $140M per year : State law directs that 5% of CEA $14 B $1.7B Assessment invested in P&C Assessment layer investment income, or $5M $4.7B per year (whichever is less), is invested in earthquake-loss-mitigation activities. $12 B $13M per year : This proposal would increase that to 25% CEA Assessment $430M (and eliminate the “whichever is less” invested in CEA Assessment layer $10 B Bond Proceeds $700M language), and expand the activity scope to resiliency efforts for other natural disasters (wildfires, floods, etc.). $8 B Each year, CEA would calculate how Reinsurance much it will save on its reinsurance $4.1B This would increase — from $5M to $25M expense and invest that amount in its per year — funding for loss mitigation, claim-paying capacity. $6 B while expanding the scope to resiliency. The available funding would grow over This will allow the CEA to continue to time as CEA investment income increases. grow and keep rates more affordable. $4 B Capital CEA’s capital will build up faster. The $5.7B capital built up — and invested as $2 B above — will also ensure that any potential assessment will become even less likely with each passing year. 0 $17.3B 1/23/2018 10
Chief Actuary, CEA
The Approval Process CEA Advisory Panel has now taken action: – Under California Insurance Code section 10089.26(a)(2), the CEA Advisory Panel has the responsibility and authority to approve, for submission to the Governing Board, condominium earthquake-loss-assessment-coverage rates. – At its January 23, 2018, meeting, the Panel reviewed staff’s analysis of condominium earthquake-loss-assessment- coverage rates and voted unanimously to support staff’s proposed pricing for that coverage . Insurance Commissioner review/approval: CEA staff asks the Governing Board to accept for consideration the rate and form application now before it and direct staff to submit that application to the Insurance Commissioner for regulatory review and approval . 1/23/2018 12
Rate and Form Application CEA staff has completed a thorough analysis of the CEA’s June 30, 2017, portfolio. Recommendations: CEA staff recommends: a 0.4% increase in CEA’s statewide average rates; • an enhanced “hazard mitigation discount,” to be applied to • qualifying CEA homeowners policies; imposing certain additional rating factors and adding new • rating territories; and publishing and implementing new editions of each of the • CEA’s insurance -policy forms, as well as incorporating refinements in coverages, definitions, and other policy language. 1/23/2018 13
Expanded Hazard Reduction Discount For Homeowners & Homeowners Choice Expand the verified-mitigation discount, subject to these criteria: • Pre-1980 frame construction on a raised or combination (rating factor: o “other”) foundation: Can receive up to a 25% mitigation discount, if the policyholder has properly verified all of the following: Dwelling anchored to foundation, in accordance with California Building Code (CBC) standards, using approved anchor bolts or foundation anchors; and water heater secured to the building frame in accordance with Guidelines for Earthquake Bracing of Residential Water Heaters (Division of State Architect). Cripple-wall-house bracing compliant with CBC bracing standards. Houses with post-and-pier or post-and-beam foundation must be modified in accordance with CBC standards. A verification form signed by a contractor or designated professional o must be submitted to obtain this expanded mitigation discount. The current self-verified 5% mitigation discount would be discontinued. o 1/23/2018 14
Rate Development The process used to develop the proposed CEA rates is the same as in the prior analyses underlying currently approved CEA rates. – Expected losses are developed using the CoreLogic model (RQE v. 17) as applied to the June 30, 2017, CEA insurance-policy portfolio, adjusted for the expected duration the rates will be in effect. – CEA expense categories are determined largely by law (including applicable regulations) and contracts . 1/23/2018 15
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