Calif. Passes Bill to Fund Earthquake Authority with $1.3 Billion from Insurers

The California Legislature has passed SB 430, designating $1.3 billion from participating insurers to fund the California Earthquake Authority (CEA).

This additional $1.3 billlion contribution is being made with no compensation to the particpating insurers (PIs), and brings total financial support by the PIs for the CEA to more than $3 billion, when combined with other current commitments.

The Association of California Insurance Companies (ACIC), the American Insurance Association (AIA) and the Personal Insurance Federation of California (PIFC) have supported the legislation to implement this funding, saying that is vital to maintaining the investment-grade rating (A-) that the objective and respected rating agency A.M. Best has said it will assign to the CEA if SB 430 becomes law,” the associations said.

A.M. Best said the “A-” financial strength services rating will be affirmed with a stable outlook, once the bill is signed into law by the Governor.

“Without SB 430, the CEA will not have adequate financial backing and will have to disclose that it may not be financially viable by the end of 2007,” said Rex Frazier of PIFC, Ken Gibson of AIA and Sam Sorich of ACIC.

They predicted the result of the CEA being financially unviable could ultimately result in it being downgraded to junk bond status. If SB 430 is not enacted it will be very difficult for the CEA to renew and write new policies starting in December 2007. Furthermore, if the CEA can’t sell or renew policies, the availability of earthquake insurance coverage available to homeowners in California will decline and many Californians living in earthquake-prone regions of the Golden State will be unable to get the coverage they need, they said.

“SB 430 represents many months of discussions to forge common ground to ensure the protection of California homeowners and broad availability of earthquake coverage that is integral to protecting a homeowners’ market that has already suffered recently from other significant problems,” Gibson, Sorich and Frazier added.

The CEA is the largest privately financed and publicly managed catastrophe pool in the country.

Source: AIA, ACIC, PIFC