August 6, 2012
S. 637, introduced by Sens. Barbara Boxer and Dianne Feinstein, D-Calif., would displace an existing private market by replacing private reinsurance with a federal government debt guarantee in the capital structure of the California Earthquake Authority. This study evaluates the feasibility of S.637, and considers its expected cost. Objective analysis of the bill demonstrates it cannot meet expectations to radically reduce the cost of or drastically increase the take-up of earthquake insurance. While proponents of the bill project it would produce a 33 percent reduction in premiums and an 85 percent increase in policyholder take-up, this study concludes a best case scenario of an 8 percent decrease in the cost of CEA coverage and a 3.5 percent increase in take-up. In addition, S.637 would shift the cost of California earthquake risk forward in time; increasing post-loss premiums to pay for pre-loss discounts. Finally, the assumed cost neutrality to the U.S. Treasury takes as given that Treasury will charge adequate, risk-based premiums to the CEA for providing a guarantee of post-event capital. Other federal risk transfer programs have made similar promises, but S. 637 would be unique if it actually achieved such an outcome. Policymakers should consider S.637 in light of this analysis.