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CA Department of Insurance

Accounting Statement 96-1

STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE

45 Fremont Street
San Francisco, CA 94105

Accounting Statement 96-1

November 15, 1996



TO:   All Property & Casualty Insurers Admitted to do Business in
         California and Other Interested Parties

SUBJECT:   Contribution to the Operating Capital of the California
           Earthquake Authority ("CEA")


Introduction and Scope:

This Accounting Statement establishes the guidelines for accounting and
reporting for the contribution to the initial operating capital and
continuing available capital of the CEA.

Assembly Bill 2086 (Chapter 968, 9/27/96) (the Homeowners' Insurance
Availability Act of 1996) and Senate Bill 1993 (Chapter 967, 9/27/96) were
both recently enacted as urgency measures to facilitate the commencement
of operations of the CEA.  The two new Insurance Code Sections that relate
to the funding of the initial operating capital and continuing available
capital of the CEA are Sections 10089.15 (Section 4 of AB 2086) and
10089.23 (a)(1)(Section 15 of SB 1993) respectively.  These Insurance Code
Sections read as follows:

"10089.15.
(a) Initial operating capital shall be contributed by insurance
     companies admitted to write residential property insurance in the
     state.   Each insurer that elects to participate in the authority shall
     contribute as its share of operating capital an amount equal to one
     billion dollars ($1,000,000,000) multiplied by the percentage repre-
     senting that insurer's residential earthquake insurance market share
     as of January 1, 1994, as determined by the board. A minimum of seven
     hundred million dollars ($700,000,000) in commitments shall be
     required before the authority may become operational.

(b) Until the authority becomes operational, contributions of initial
     operating capital shall be held by the commissioner in trust for the
     contributing insurers in the California Earthquake Authority Fund.

(c) Because insurers will retain the risk of earthquake losses on indivi-
     dual earthquake policies until they are renewed into the authority,
     participating insurers may elect to contribute operating capital in 12
     installments payable on the first day of each successive calendar
     month after the insurer elects to participate.  Each insurer shall
     compute its monthly installment based on the portion of the insurer's
     earthquake coverage that will be renewed into the authority during the
     next month.  The final installment shall be equal to the excess of the
     participating insurer's required contribution over the sum of the
     previous 11 installments.  Those insurers that elect to participate
     in the authority after the beginning operating date of the authority
     shall make initial capital contributions calculated using their resi-
     dential earthquake insurance market share as of January 1, 1994, or the
     date of their election to participate in the authority, whichever
     contribution amount is greater.

(d) An insurer or insurer group that represents 1.25 percent or less of the
     residential property insurance market, as measured by premium volume,
     or that has a surplus of less than one billion dollars ($1,000,000,000),
     may elect to become a participating insurer with the full rights and
     responsibilities of participating insurers of the authority, pursuant
     to the provisions of this section.

(e) The insurer or insurer groups defined in subdivision (d) may elect to
     contribute their operating capital, as required by subdivision (a) of
     Section 10089.15, in 60 equal monthly installments, payable on the
     first day of each successive calendar month after the insurer elects
     to participate.  In the event that earthquake losses result in the
     authority's payment of claims while the authority's available funds are
     inadequate to meet claims liabilities, and insurers participating
     under this section have operating capital contributions outstanding,
     the operating capital contributions necessary to meet any unfunded
     claims liabilities will become due and payable within 30 days of a
     request for such accelerated payment by the board, not to exceed the
     maximum contribution owed by each insurer.

(f) No insurer may elect to contribute operating capital pursuant to sub-
     division (e) unless the aggregate premium or aggregate surplus of all
     affiliated insurers in its group meets the eligibility standards
     established by subdivision (d)."

"10089.23.
(a) (1) If at any time following the payment of earthquake losses the
     authority's available capital is reduced to less than three hundred
     fifty million dollars ($350,000,000), or if at any time the authority's
     available capital is insufficient to pay benefits and continue
     operations, the authority shall have the power to assess participating
     insurance companies subject to the maximum limits as set forth in this
     section and Section 10089.30. The assessment shall be limited to the
     amount necessary to pay the outstanding or expected claims of the
     authority and to return the authority's available capital to three
     hundred fifty million dollars ($350,000,000), as determined by the
     board, subject to approval by the commissioner."

Financial Statement Accounting and Disclosure:

The accounting and disclosure requirements for annual and quarterly
statutory statements for the contributions to the initial operating and
continuing available capital of the CEA are as follows:

1. If a contribution is paid to the CEA before it becomes operational
   [Section 10089.15(b)], that amount shall be reported as a write-in asset
   with the appropriate disclosure - "Funds in trust for CEA".  When the
   CEA becomes operational, funds held in trust shall then be recorded as an
   expense in accordance with paragraph 2 below.

2. a) If an insurer has paid its contribution into the trust and the CEA
      becomes operational, or,
    b) If once the CEA becomes operational, an insurer pays its entire
      contribution to the CEA upon its election to participate (i.e., it
      does not choose the installment basis for payment), or, c) if an
      assessment is made to return the CEA's available capital to
      $350,000,000 [Section 10089.23(a)(1)], the insurer shall recognize
      and record the entire contribution as an expense through operations
      at the date it is incurred in accordance with paragraph 5 below.

3. If an insurer chooses to pay its contribution on an installment basis,
   [either in 12 or 60 monthly installments per Subsections 10089.5(c) or
   (e)], the insurer shall recognize and record the full amount of its
   contribution as a deferred expense (an asset) at the date it is
   incurred in accordance with paragraph 5 below.  The deferred expense
   shall be recorded as a write-in asset and shall be not admitted, thereby
   reducing surplus immediately.  The deferred expense shall be amortized
   monthly in an amount equal to the installment payment, and recorded as an
   expense through operations when each installment is paid.

4. The expense recorded through operations for the contribution to the
   initial operating capital or the continuing available capital of the
   CEA shall be recorded as negative miscellaneous income, a write-in item
   on the statement of income.  It shall not be recorded as an underwriting
   income deduction. 

5. For the purpose of this Accounting Statement, the expense (or liability
   for the expense) or the deferred expense shall be recognized when both
   of the following conditions are met:

   a. Information available prior to issuance of the statutory financial
      statements indicates that it is probable that an asset has been
      impaired or a liability has been incurred at the date of the
      statutory financial statements.  It is implicit in this condition
      that it is probable that one or more future events will occur
      confirming the fact of the incurrence of a liability, and

   b. The amount of the liability can be reasonably estimated.

      It is important to note that, a) in the case of the initial operating
      capital contribution, it is not necessary that the agreement to
      participate be executed, or, b) in the case  of the continuing
      available capital contribution, it is not necessary that an assessment
      billing be received from the CEA in order to trigger the requirement
      for the recording of the expense or deferred expense.

Effective Date:

The provisions of this Accounting Statement shall be effective immediately. 
Therefore, the annual statement as of December  31, 1996 and all subsequent
annual and quarterly statements shall include the required accounting and
disclosures.

Any questions relating to this Accounting Statement should be addressed to:


Mr. Norris W. Clark, Deputy Commissioner
Department of Insurance
Financial Surveillance Branch
300 South Spring Street, South Tower
Los Angeles, California 90013
(213) 346-6401


                                                 Chuck Quackenbush
                                                 Insurance Commissioner

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