Thursday, January 25, 2018 10:00 a.m. Chief Executive Officer, CEA - - PowerPoint PPT Presentation

Thursday, January 25, 2018 10:00 a.m.

Chief Executive Officer, CEA

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Uninsured

CEA

Non CEA

There are 14 Million housing units* in California. Only 9% have earthquake insurance – most through the CEA. Scientists say there is a 99.3% probability of M6.7 earthquake

• r 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

More Californians need earthquake insurance

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$17.3B

2018

Capital $5.7B IAL $1.7B Bond Proceeds $700M Reinsurance $9.2B

CEA maintains a very safe level of claim-paying capacity: only once in 400 years would earthquakes exhaust CEA resources.

• Annual probability of 1-in-

400 years or just one quarter of one percent.

If any of the most damaging earthquakes in California history were to reoccur today, CEA would pay covered losses with capacity to spare. But statewide, total uninsured residential losses will be more than 10X greater than CEA- policyholders’ losses.

Estimated CEA loss if historical events reoccur:

CEA pays claims “from the bottom up” of the tower Order of Claim-Payment Resources

1994 Northridge: $6B 1989 Loma Prieta: $1B 1906 San Francisco: $9B

CEA offers The Strength to Rebuild for CEA policyholders

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$14 B $12 B $10 B $8 B $6 B $4 B $2 B $16 B $18 B

$17.3B

2018

Capital $5.7B IAL $1.7B Bond Proceeds $700M Reinsurance $9.2B

• Post-event assessments—if

needed, would be paid by CEA participating insurers.

• Proceeds realized through sale of

CEA’s (pre-event) revenue bonds, already issued.

• Reinsurance is basically

insurance for insurance companies.

• CEA purchases from

reinsurance companies around the world, and through global capital markets.

• Money held in conservative

investments and available to pay claims.

• CEA participating insurers

made initial capital contributions totaling $800M.

• The remaining $5B represents

accumulated CEA policyholder premium and investment income. IAL (Industry Assessment Layer): Bond Proceeds: Reinsurance: Capital:

CEA has become one of the largest buyers of reinsurance in the world. Since inception in 1996:

$10.9B: Total CEA policyholder premium $4.3B: Total CEA reinsurance premium $250,000: Total of reinsurance proceeds received by CEA

CEA depends heavily on reinsurance

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754,672 775,464 779,362 800,930 811,317 820,932 841,503 841,836 865,084 879,540 931,589

1,021,707

700,000 750,000 800,000 850,000 900,000 950,000 1,000,000 1,050,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Organic New Participating Insurers

2016 increase: 52,000 policies 2006–2015 average annual increase: 6,700 policies 2017 increase: 90,707 policies

*Final numbers as of Jan. 24

*

New and unprecedented CEA policy growth:

CEA has developed affordable and flexible insurance options and is now experiencing unprecedented growth:

More Californians are choosing CEA.

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$4.5 $4.7 $5.0 $5.3 $5.4 $5.6 $5.8 $6.0 $6.2 $6.3 $3.1 $3.8 $4.1 $5.5 $7.5 $9.3 $11.0 $12.9 $15.1 $17.7 $0.3 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $0.7 $2.0 $2.0 $1.9 $1.8 $1.7 $1.7 $1.7 $1.7 $1.5 $1.3

$9.9 $11.2 $11.7 $13.3 $15.3 $17.3 $19.2 $21.3 $23.5 $26.0 $- $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

(in $ billions)

CEA Available Capital Risk Transfer Revenue Bonds Industry Assessment

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 Expense

$213M $194M $189M $202M $315M $395M $467M $548M $642M $752M

If the upward trend continues, CEA will be forced to raise policyholder rates significantly, every year.

CEA’s annual reinsurance expense is rising dramatically.

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2018

$14 B $12 B $10 B $8 B $6 B $4 B $2 B $16 B $18 B

$17.3B

Capital $5.7B IAL $1.7B Bond Proceeds $700M Reinsurance $9.2B

$17.3B

Capital $5.7B IAL $1.7B Bond Proceeds $700M Reinsurance $4.1B CEA Assessment $430M Property & Casualty Assessment $4.7B

Solution

All Property and Casualty Policyholder Assessment

• No more than 1% of premium,

in the aggregate – may increase with exposure growth, using an index formula.

• Actual assessment apportioned

according to relative EQ risk.

• Annual probability
• f assessment: 0.56%

1-in-178 chance of occurring

CEA Policyholder Assessment

• No more than 10% of premium
• Annual probability
• f assessment: 0.6%

1-in-164 chance of occurring

Replacing a portion of reinsurance with potential post-event assessment:

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Capital $5.7B IAL $1.7B Bond Proceeds $700M Reinsurance $4.1B CEA Assessment $430M Property & Casualty Assessment $4.7B $14 B $12 B $10 B $8 B $6 B $4 B $2 B $16 B $18 B

State law directs that 5% of CEA investment income, or $5M per year (whichever is less), is invested in earthquake-loss-mitigation activities. This proposal would increase that to 25% (and eliminate the “whichever is less” language), and expand the activity scope to resiliency efforts for other natural disasters (wildfires, floods, etc.). This would increase—from $5M to $25M per year—funding for loss mitigation, while expanding the scope to resiliency. The available funding would grow over time as CEA investment income increases.

CEA would spend $25M annually for earthquake-loss mitigation and natural- catastrophe resiliency projects. CEA would double the amount it reinvests in its claim-paying capability.

Each year, CEA would calculate how much it will save on its reinsurance expense and invest that amount in its claim-paying capacity. This will allow the CEA to continue to grow and keep rates more affordable. CEA’s capital will build up faster. The capital built up—and invested as above—will also ensure that any potential assessment will become even less likely with each passing year.

$17.3B

$140M per year:

invested in P&C Assessment layer

$13M per year:

invested in CEA Assessment layer

Benefits: Earthquake insurance would remain available for all Californians and funding for natural-catastrophe resiliency would rise.

Chief Actuary, CEA

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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.

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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.

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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:

“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

• f 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

must be submitted to obtain this expanded mitigation discount.

• The current self-verified 5% mitigation discount would be discontinued.

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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.

Rate Development

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CEA Product Proposed Rate Change: Year 1 Proposed Rate Change: Year 2 Proposed Rate Change: Year 3 Homeowners

• 2.8%

0.5% 2.1%

Mobilehome owners

• 10.1%
• 5.2%
• 2.1%

Condominiums

• 16.9%
• 15.4%
• 14.4%

Renters

• 20.8%
• 19.9%
• 19.8%

OVERALL

• 4.2%
• 1.1%

0.4%

NOTES TO TABLE: 1. Proposed rate changes part of three-year phase-in, measured for each year (relative to current rate levels and assuming no coverage changes.) 2. Average indications, both by segment and overall. 3. Rate impacts on individual CEA policyholders will vary.

Rate Indications

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• Most recent seismic research has resulted in updated views
• f “best available science,” which in turn is incorporated into

the commercial catastrophe-loss models that CEA uses.

• By law, CEA must base its rates on the best

available science.

• CEA would introduce “roof-type” as a rating factor for CEA

homeowners-insurance policies.

• Increased risk-transfer expense.

Rate-Change Drivers

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Policyholder Impacts

Under this proposed rate application, individual CEA policyholders may see their rates increase or decrease, depending on the CEA insurance product they have purchased, the location of the insured property, and the application of related rating factors. Based on their current coverage limits:

• ver 55 percent of CEA policyholders would see their

rates decrease by more than 10 percent;

• about 20 percent would see unchanged or slightly lower

rates; and

• about 20 percent of CEA policyholders would see their

rates increase by more than 10 percent.

All changes would be implemented for new and renewal CEA policies that are effective on or after January 1, 2019.

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RECOMMENDED ACTION:

CEA staff recommends that the Governing Board:

• 1. Approve the proposed rate-and-form application, including

the new CEA Rate Manual, the revised CEA Earthquake Insurance Application, and a new edition of each of the CEA’s residential earthquake insurance policy forms; and

• 2. Authorize CEA staff to submit the complete application and

attachments to the Insurance Commissioner for consideration and approval.