1. Earthquake Insurance for California Renters & Homeowners Presented to the Bay Area Earthquake Alliance Daniel P. Marshall, III General Counsel California Earthquake Authority

2. The Big Picture 1992Andrew ($15.5 B) 2001WTC ($18.8 B) 2004 Four Storms (Charley, Ivan, Frances, Jeanne) ($18 B) 1994Northridge ($12.5 B) 2005 Four Storms (Dennis, Katrina, Rita, Wilma) ($58 B) 2008–2009 Storms: Gustav, Ike; Global Financial Meltdown ($BB) The economic risks of natural catastrophes have become increasingly evident over the last 15–20 years 7 of 10 most costly catastrophes have occurred since 2004 2008 was the third worst year on record for insured losses from natural disasters

3.  Increasing government involvement in catastrophe insurance and reinsurance:  FHCF – 1993  CEA – 1996  TRIA – 2002  Citizens (FL) – 2002  Citizens (LA) – 2003  HR 3355 - 2007  These programs are intended to address the affordability and availability problems created by the large, lumpy, and unpredictable losses generated by these events.  States have implemented various structures, but all could benefit from certain access to post-event funding. One Result

4. The Missing Link The Federal Government is the only entity that can reliably address the timing risk created by natural catastrophes to promote availability and affordability of property insurance. An integrated public/private partnership that minimizes direct federal participation, avoids subsidies, and promotes mitigation can provide the missing link to the long-term solution

5. One Approach – S.886 What it is not: ◦A Florida bailout ◦A comprehensive national catastrophe plan ◦A scheme to subsidize homeowners in high risk areas What it does: ◦Provides limited debt guarantees for qualified state programs that have:  Actuarially sound rates  Extensive public sector sponsorship and involvement  A demonstrated ability to repay debt without support from the Feds ◦Funding certainty provided by the program can:  Strengthen existing state programs  Enhance affordability for consumers  Stabilize insurance markets  Encourage new state program development with desirable financial characteristics  Limit need for post-event financing by the Feds

6. A Case Study: The CEA

7. 1994: Northridge Earthquake Total Loss: $40 B Residential Loss: $14 B 1995: Insurance Crisis in California Industry unsuccessfully sought repeal of mandatory EQ offer 95% of residential market virtually stopped writing HO coverage 1996: CEA Established Public instrumentality of the state Privately financed and publicly managed HO market restored Today: Largest Provider of EQ Insurance in U.S. 770,000 policyholders (70% of California residential EQ market) $9.5 B claim-paying capacity CEA Background

8. 26% 36% 12% 9% CEA 12% Take-up Rate: CA Residential EQ Insurance Northridge

9. California Earthquake Authority 1997-2008 Total Policyholder Premiums Collected $5.4B Total Policyholder Premiums Collected $5.4B Policyholders Expenses * $1.0B CEA Capital $2.1B CEA Capital $2.1B Reinsurance Companies Reinsurance Recoveries $250,000 Total Reinsurance Premium Paid $2.3B Total Reinsurance Premium Paid $2.3B Major Expense Categories 1.Agent Commissions 2.Debt Financing 3.PI Fees 4.CEA Operations

10. Reinsurance ($200 M/year) Reinsurance ($200 M/year) $3.3B CEA Capital $0.3B $3.1B $2.8B Current Financial Structure Total = $9.5B (Capacity 1-in-545 year) A More Efficient Approach California Earthquake Authority Financial Structure Revenue Bonds Industry Assessment Layers Post-Event Borrowing CEA Capital Revenue Bonds Industry Assessment Layers

11. Post-Event Borrowing Industry Assessment Layers Post-Event Borrowing Revenue Bonds Reinsurance CEA Capital Capacity in each case: 1-in-500 Year California Earthquake Authority Financial Structure: Alternative Approaches CEA Capital Post-Event Borrowing Industry Assessment Layers Reinsurance CEA Capital Post-Event Borrowing Reinsurance Industry Assessment Layers Revenue Bonds

12. Rate Reduction and Ability to Repay Debt S.886 would allow CEA to significantly reduce premium rates for EQ insurance CEA would retain (as capital) claim-paying capacity for 1-in-200 year event Probability of borrowing only.5% - 1% Debt to pay for mega-catastrophe would be repaid by modest premium increase imposed post-event

13. Current Policy Dwelling Coverage: $400,000 Contents: $50,000 Deductible: 15% * Damage to dwelling must exceed $60,000 before any loss is covered Average Premium Today: $924 Homeowners Select Dwelling Coverage: $200,000 Contents: $50,000 Deductible: 15% Dwelling - $30,000 Contents - $7,500 Value for Consumers *Deductible of 15% = $60,000 Dwelling Coverage: $400,000* Dwelling Coverage: $400,000 (Restore full coverage) Deductibles: Dwelling = $30,000 Contents = $7,500 Homeowners Select Plus Dwelling Coverage: $400,000 Contents: $50,000 Deductible: Dwelling - $30,000 (7.5%) Contents - $7,500 (15%) Note: All policies include $15,000 ‘Loss of Use’ coverage Deductibles: Dwelling = $30,000 Contents - =$7,500 Dwelling Coverage: $200,000 (50% of full coverage) Average Premium w/COGA: $500 Average Premium w/COGA: $516 Average Premium w/COGA: $639

14. CEA VISION More (and smarter) policy choices for consumers Lower premium rates Lower deductibles Increase number of Californians protected by EQ insurance Maintain CEA financial strength—without asking other states to subsidize California’s risk Decrease need for government assistance after major earthquake