California Governor Schwarzenegger is expected to sign into law SB 430, a bill that will set the commitment of participating insurers to fund the California Earthquake Authority (“CEA”) at $1.3 billion.  Further, the bill will allow participating insurers to raise rates by $55, roughly an 8% increase over the average policy premium.

The CEA is a tax-exempt, quasi-public insurance company created in 1996 that provides catastrophic earthquake coverage to Californian homeowners.  It is the largest such catastrophic pool in the country, providing coverage to 750,000 policyholders of participating insurers.  According to its website, the CEA has over $8 billion in claims-paying capability as a result of proceeds from policyholder premiums, contributions from and assessments on participating insurance companies, borrowed funds, reinsurance, and the return on invested funds.

Prior to SB 430, participating insurers were obligated to fund the CEA’s reserves with $2.2 billion, a 12-year obligation that was scheduled to sunset by December 1, 2008.  Industry insiders believe that without this funding support from participating insurers, the CEA will not be able to maintain the investment grade rating (A-minus) it currently holds with rating agency A.M. Best.

Although seen by critics as a way to pass the costs of a catastrophic earthquake to California homeowners, others say that the bill is a fair compromise that will keep insurers from leaving the market altogether.  According to Sabrina Lockhart, a spokeswoman for the Governor’s office, “We want to be in the position where we will be able to continue this important safety net for consumers.”

To view the entire text of the bill the Governor is expected to sign into law, click here.