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:
(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 representing 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 individual 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 residential 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 subdivision (e) unless the aggregate premium or aggregate surplus of all affiliated insurers in its group meets the eligibility standards established by subdivision (d)."
(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:
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.
(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 operationsat the date it is incurred in accordance with paragraph 5 below.
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.
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.
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.
The provisions of this Accounting Statement 96-1 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:
Deputy Insurance Commissioner
Department of Insurance
Financial Surveillance Branch
300 South Spring Street, South Tower
Los Angeles, California 90013
Deputy Insurance Commissioner
Financial Surveillance Branch