California quake insurance on the rise, cat bonds an innovation: CEA

by Artemis on August 1, 2017

The California Earthquake Authority (CEA), the not-for-profit, privately funded, publicly managed insurer, said that uptake of its earthquake insurance policies has increased, continuing a trend that began in 2016. Additionally, the CEA noted that its use of catastrophe bonds represents “a key innovation in growing its claim-paying funds.”

The CEA closed out the second quarter of 2017 with over 950,000 earthquake insurance policies in force, having seen growth of 52,000 policies in force in 2016, which is significantly higher than the ten-year average of 7,200 annual policy purchases.

Interest in California earthquake insurance remains strong in 2017 and uptake is well above the average again, with 18,804 more policies purchased in the first six months of the year, taking the CEA’s total policies in force to 950,393 at the end of June 2017.

California has always had particularly low uptake of earthquake insurance coverage, with mortgage lending banks not forcing their customers to buy protection. In the past the uptake of quake insurance in the state by homeowners has been as low as 10%, but the work of the CEA is helping to increase that figure, along with a general increase in awareness of the risk.

“Californians are listening to what the scientific community is telling us—that we are overdue for a large earthquake, and we need to be ready when it strikes,” commented CEA CEO Glenn Pomeroy. “More Californians are insuring their homes so they can recover financially following a large and damaging earthquake, which scientists say is not a matter of if, but when.”

Helping the CEA to offer insurance more affordably and providing the risk transfer should a major event occur, the reinsurance and catastrophe bond market play a vital role in ensuring the CEA has the claims paying ability to back-up its near 1 million policies.

The CEA’s claim-paying capacity now exceeds $15 billion, which the insurer says is sufficient to pay covered losses if a major earthquake, like the 1906 San Francisco, 1989 Loma Prieta or 1994 Northridge earthquake, were to strike California today.

Of the $15 billion, $7.42 billion is sourced from the reinsurance and capital markets, with $2.07 billion of that secured through the transformer or catastrophe bond deals that remain in-force.

The CEA secured $925 million of reinsurance protection through its May sponsorship of the Ursa Re Ltd. (Series 2017-1) cat bonds, while another $500 million was secured in November 2016’s Ursa Re Ltd. (Series 2016-1) transaction.

“We rely on the best available science to ensure we’re on solid ground financially,” Pomeroy said. “And through smart, innovative financing, our claim-paying funds continue to grow as CEA covers more and more residences in California.”

More of the $7.42 billion of coverage has been secured from the capital markets, with collateralized reinsurance provided by ILS funds also participating in the CEA’s program.

The CEA explains the catastrophe bond programs as “a key innovation in growing its claim-paying funds,” with the capital markets and ILS investors now contributing a significant proportion of its reinsurance and a growing share of its overall claims paying capacity.

With the catastrophe bond market keen to assume more California earthquake risk, at the moment pure U.S. quake risks make up only 12.8% of the outstanding cat bond market.

That suggests the cat bond market would keenly soak up further issues from the CEA and we are likely to see the insurer back in the cat bond market in the next few months, as long as pricing remains attractive.

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