HomeMy WebLinkAboutMINUTES - 07102012 - C.21RECOMMENDATION(S):
SUPPORT S. 637 (Senators Feinstein & Boxer) and H.R. 3125 (Representative John Campbell & 12 co-authors),
The Earthquake Insurance Affordability Act, a bill to establish a program to provide guarantees for debt issued by or
on behalf of State catastrophe insurance programs to assist in the financial recovery from earthquakes,
earthquake-induced landslides, volcanic eruptions, and tsunamis, as recommended by the Legislation Committee.
FISCAL IMPACT:
The Senate bill would authorize the U.S. Treasury Department to guarantee up to $5 billion in loans for insurers, such
as the California Earthquake Authority, to borrow from private lenders. The cost of the loan guarantees and the
administration of the program would be covered by the participating state programs and will come at no cost to U.S.
taxpayers.
BACKGROUND:
The Earthquake Insurance Affordability Act (EIAA) is a bill introduced
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On: 07/10/2012 APPROVED AS RECOMMENDED OTHER
Clerks Notes:
VOTE OF SUPERVISORS
AYE:John Gioia, District I Supervisor
Candace Andersen, District II
Supervisor
Mary N. Piepho, District III
Supervisor
Karen Mitchoff, District IV
Supervisor
Federal D. Glover, District V
Supervisor
Contact: L. DeLaney,
925-335-1097
I hereby certify that this is a true and correct copy of an action taken and entered on the minutes of the Board
of Supervisors on the date shown.
ATTESTED: July 10, 2012
David Twa, County Administrator and Clerk of the Board of Supervisors
By: Carrie Del Bonta, Deputy
cc:
C. 21
To:Board of Supervisors
From:Legislation Committee
Date:July 10, 2012
Contra
Costa
County
Subject:SUPPORT S. 637 (Feinstein & Boxer) and H.R. 3125 (John Campbell & 12 co-authors), The Earthquake Insurance
Affordability Act
BACKGROUND: (CONT'D)
on Capitol Hill by its sponsors in the Senate, U.S. Senators Dianne Feinstein and Barbara Boxer (D-CA), and
sponsors in the House of Representatives, John Campbell and others, designed to lower rates so more
homeowners can afford earthquake insurance coverage. The federal bill would apply to all nonprofit, state-run
earthquake insurance programs across America. The Earthquake Insurance Affordability Act (S. 637) was written
as "a bill to establish a program to provide guarantees for debt issued by or on behalf of State catastrophe
insurance programs to assist in the financial recovery from earthquakes, earthquake-induced landslides, volcanic
eruptions, and tsunamis."
Recent severe earthquakes have underscored the need for California and its homeowners to be financially
prepared, as the state has two-thirds of the earthquake risk faced by America. In fact, experts are almost certain a
major earthquake will occur in California within the next 30 years. Despite these risks, less than 10% of
households are covered by earthquake insurance, with most consumers claiming it is too expensive.
The EIAA would allow the California Earthquake Authority (CEA) to lower costs by allowing the federal
government to guarantee bonds issued by CEA, in lieu of purchasing reinsurance, which currently accounts for
40% of its costs. This would save an estimated $100 million per year and allow the CEA to lower its rates by
20%, allowing more homeowners to afford earthquake insurance and speed economic recovery when the next
“big one” hits.
In the event of a major earthquake, expenses to federal, state, and local governments would be mitigated with
increased earthquake coverage. Furthermore, the EIAA will not cost taxpayers any money because the Treasury
Department would charge the CEA for its guarantee and could adjust the fee upward after a major disaster.
Even in the quake-famous state of California only 10 percent of homeowners have supplemental earthquake
coverage. It is generally considered too expensive for working families. Earthquake insurance policies typically
carry a deductible calculated as a percentage of the replacement value of the home. For example, on a $500,000
home with a 10 percent deductible, the homeowner pays the first $50,000 in repair bills before the earthquake
coverage kicks in.
This bill is not intended just for California. It would apply to all states, including states in the New Madrid seismic
zone and the seismically-active western states, as well as the East Coast states recently struck by a quake. There
are active earthquake faults across the United States from coast to coast. Nationwide, earthquakes are increasing at
an alarming rate, occurring in places that have not felt a quake in modern memory. It is simply a fact of life in the
21st century, unfortunately. Earthquake preparedness is not only a California issue, it is now a nationwide
American issue.
When an earthquake hits a great number of homes which have no earthquake insurance policy, who ends up
covering the repairs and reconstruction? The U.S. government, or the taxpayer--to be exact. If earthquake
insurance premiums are lowered, however, it is assumed that a greater numbers of homeowners will purchase an
earthquake policy.
Senator Dianne Feinstein states: "We cannot prevent an earthquake, but we must do everything we can to prepare
for one by ensuring homeowners have access to affordable earthquake insurance coverage."
Senator Barbara Boxer states: "I am proud to join with Senator Feinstein to introduce legislation that would help
homeowners in California access affordable earthquake insurance, which is critical to helping residents and
communities recover and rebuild after the devastation of an earthquake."
The Senate bill would authorize the U.S. Treasury Department to guarantee up to $5 billion in loans for insurers,
such as the California Earthquake Authority, to borrow from private lenders. The cost of the loan guarantees and
the administration of the program would be covered by the participating state programs and will come at no cost
to U.S. taxpayers.
The Earthquake Insurance Affordability Act has been referred to the U.S. Senate Banking, Housing, and Urban
Affairs Committee.
See Attachment A for a copy of the bill. Attachment B is an overview of the EIAA. Attachment C is a letter of
support from CSAC.
At their June 7, 2012 meeting, the Legislation Committee considered the bill and expressed support for the
concept. However, the Committee requested additional information about how the cost savings would be passed
on to the homeowners. The response from staff of the CEA is as follows:
"The California Earthquake Authority (CEA) is a non-profit organization that is privately funded and publicly
managed. If EIAA were enacted, entities such as CEA (public earthquake insurers, with solid financial ratings and
sound insurance practices) would simply build a part of its insuring capacity with a limited amount of
post-earthquake bonds issued by that entity in the private debt market––those bonds would enjoy broad market
acceptance through a supporting federal guarantee, but under EIAA, no federal dollars would ever flow to the
CEA. That financing method will significantly lower CEA's expenses, allowing CEA to benefit its policyholders.
And as a public entity with no profit motive, it welcomes that opportunity.
The CEA’s Governing Board is made up of the Governor, State Treasurer, and Insurance Commissioner—all
have a fiduciary duty that they discharge with greatest care, meeting bimonthly in noticed, open public session to
discuss and pass on all CEA business matters. That Board controls all CEA budget and expenditures, including
(except for civil servants) salaries.
The CEA’s revenues and expenditures are scrutinized by international rating agencies, the elected Insurance
Commissioner, independent financial auditors, an independent financial advisor, a qualified actuary, and an
internal audit team. Financials are posted on the public CEA Web site. There is neither motive nor opportunity for
the CEA to do anything with expense savings but apply them to the benefit of policyholders, whether by lowering
rates, lowering deductibles, or providing other coverage benefits."
CONSEQUENCE OF NEGATIVE ACTION:
If the Board of Supervisors does not act on this bill, there will be no formal policy position on this matter from
which to advocate.
CHILDREN'S IMPACT STATEMENT:
Not applicable.
ATTACHMENTS
S. 637 Bill Text
An Overview of the Bill
CSAC Letter of Support for S. 637
August 31, 2011 The Earthquake Insurance Affordability Act 1 | Page
The Earthquake Insurance Affordability Act (EIAA)
Empowering Homeowners / Protecting Taxpayers
The summer of 2011 saw our nation hit by tornadoes, earthquakes,
and massive storms—they took lives and damaged homes and
businesses across the nation.
And in a profound show of Nature’s power, even the iconic
Washington Monument was cracked by the East Coast earthquake in
August—it was an event lasting less than a minute but created
severe damage to the structure that compelled the U.S. Parks
Service to hang a “closed to visitors” sign on the Monument
entrance.
For more than 150 years now the Monument has been an eloquent
symbol of our great nation’s strength. But so damaged, it’s a
different kind of reminder: a visual one, which in our view symbolizes
cracks in our country’s readiness to recover after disasters strike.
The recent passionate debate in Congress about disaster-relief
funding further revealed just how deep those cracks run.
Without doubt, completing the disaster-relief and recovery-funding puzzle will require hard work and
many different pieces. While the two of us may respectfully differ on the design and shape of many
puzzle pieces, there is one on which we totally agree — the need for private-sector solutions to
make homeowners’ earthquake insurance more affordable and accessible again.
EIAA is an important part of fixing the cracks.
FACT: According to the U.S. Geological Survey, earthquakes pose a
significant risk to 75 million Americans in 39 states.
FACT: Despite the imminent threat posed by a catastrophic earthquake,
only about ten percent of homeowners have earthquake
insurance. It is simply too expensive.
We can’t prevent earthquakes, so we must increase access to affordable
earthquake insurance – to help residents recover and rebuild without a
federal bailout and without any kind of taxpayer subsidy.
That is where the Earthquake Insurance Affordability Act comes in.
August 31, 2011 The Earthquake Insurance Affordability Act 2 | Page
SUMMARY OF THE LEGISLATION
At no cost to the federal government or federal taxpayers, EIAA would create a limited,
committed federal guarantee to support post-earthquake bonds of highly qualified,
actuarially sound state programs that offer residential earthquake insurance.
EIAA supports families' voluntary access to fairly priced earthquake insurance.
Qualified state programs could replace some (but by no means all) expensive
reinsurance and fully maintain their existing capacity and financial strength.
Getting more homes insured cuts earthquake-recovery costs, which are huge.
After major natural disasters, there’s pressure on the federal government to bail out families,
communities, and states.
Eighty percent of Californians live on or near a fault. Yet they're not ready for an
earthquake—fewer than 10 percent of California households are covered by earthquake
insurance.
Across the nation more than 75 million people live in earthquake-vulnerable regions, but
earthquake insurance for those homes is less available and more expensive every day.
Most consumers believe earthquake insurance is simply too expensive.
But earthquakes are expensive, too:
Federal taxpayers were on the hook for more than $9 billion after the 1994
Northridge quake, while California’s taxpayers chipped in more than half a billion
dollars more.
It would have been much more expensive for taxpayers had not so many
households in 1994 had earthquake insurance for their homes. It was over 25%
then—now it's 10%.
Lower-cost earthquake insurance will reduce federal taxpayers’ risk.
Without affordable earthquake insurance, federal bailout or taxpayer subsidy is certain.
In California, the public, nonprofit California Earthquake Authority (CEA) is the state’s
largest earthquake insurer.
Its premiums are driven by the high cost of reinsurance.
CEA must spend 40 cents of every premium dollar to buy reinsurance.
Since it opened in 1996, the CEA has paid reinsurers $2.9 billion—reinsurers
have paid CEA $250,000 for claims.
EIAA protects Federal taxpayers to speed recovery after the "big one” strikes.
EIAA is simply a debt guarantee, extended only to highly qualified borrowers. It's not a
loan. It's not a federal backstop.
EIAA provides one thing: a committed, but strictly limited, federal guarantee of private-
market, post-event debt.
Bottom line—more homeowners will be able to afford earthquake insurance and more
communities will recover more quickly—and with less federal assistance.
The EIAA will cost taxpayers zero: All fees and costs–without exception–are
borne by the qualified state program. “The Congressional Budget Office has
estimated that [EIAA] comes at no cost to the taxpayer.” (Senator Dianne
Feinstein, Congressional Record – March 17, 2011)
# # #
August 24, 2011
The Honorable Dianne Feinstein
United States Senate
Washington, DC 20510
RE: Support for the Earthquake Insurance Affordability Act (S. 637)
Dear Senator Feinstein:
On behalf of the California State Association of Counties (CSAC), I am pleased to inform you of
our support of the Earthquake Insurance Affordability Act (S. 637). CSAC is an association that
represents county government before the California Legislature, administrative agencies and
the federal government. Representing all 58 of California’s Counties, CSAC places a strong
emphasis on educating the public about the value and need for county programs and services
critical for healthy communities.
Recent catastrophic earthquakes in Japan, New Zealand and Haiti have served as painful
reminders of California’s vulnerability to similar devastation. In fact, the deadly tsunami that hit
Japan also traveled 5,000 miles across the ocean and slammed into the Northern California,
causing approximately $20 million worth of damages to Del Norte County.
No part of California is immune from earthquakes and although eighty percent of its residents
currently live on or near a fault, fewer than 10 percent of California households are covered by
earthquake insurance.
Californians need greater access to affordable earthquake insurance. The EIAA is a fiscally
sound solution that empowers homeowners and protects taxpayers. It provides a limited
guarantee that would significantly reduce insurance premiums by as much as 20 percent and
allow more homeowners to afford earthquake insurance in California.
While we cannot prevent an earthquake, we can certainly prepare for one and the EIAA is a
significant step in that direction.
It is for these reasons that we support the Earthquake Insurance Affordability Act. Should you
have any questions regarding our position, please contact me at 916-327-7500 ext. 511.
Sincerely,
Karen Keene
CSAC Senior Legislative Representative
cc: Glenn Pomeroy, Chief Executive Officer, California Earthquake Authority