CEA policy uptake rises, more risk transfer will be required: Pomeroy

The California Earthquake Association (CEA), the non-profit provider of over 76% of residential earthquake insurance policies in California, has reported a significant increase in policy uptake in 2016, which the CEO told Artemis will mean more risk transfer will likely be required.

California, as one of the most earthquake prone regions of an advanced economy, has a surprisingly low uptake of earthquake insurance coverage, but the CEA reports some success in growing the penetration of protection in the state this year.

The CEA reports that it now has over 908,000 residential earthquake insurance policies in force, up around 29,000 policies in the first eight months of 2016 and almost twice the amount of new CEA policies purchased in all of 2015.

The CEA attributes the increased willingness to buy earthquake cover to the fact that it reduced its rates for the fourth time, something which the ready availability of reinsurance and insurance-linked securities (ILS) capacity has no doubt assisted with.

It also attributes the success this year to a “dramatic” expansion of the coverage and deductible choices offered, which it says helps homeowners to choose an insurance policy that meets their requirements and budgets, putting them in a better place to recover from expensive earthquake damage.

“CEA is on a mission to help more Californians insure their homes before the next damaging earthquake strikes,” explained CEA CEO Glenn Pomeroy. “This year we are seeing a huge leap forward in policy sales, as we rolled out great new options to financially protect a home through earthquake insurance—so important in our state, with such a high earthquake risk.”

The cost and availability of risk transfer and reinsurance capacity has helped the CEA to make its policies more keenly priced in recent years, as the association has grown its risk transfer program dramatically.

The CEA makes use of catastrophe bonds, as well as both traditional and collateralised reinsurance within its program, with ILS fund managers contributing a significant portion of the capacity the association would use to pay claims in the event of a major Californian earthquake event.

With over $4.583 billion of reinsurance and capital markets transformer backed coverage now in place, as of the end of July 2016, the CEA is among the world’s largest buyers of risk transfer. With its customers now buying more insurance policies, the CEA will once again look to boost its claims paying capacity, which could see even more risk ceded to reinsurance and ILS markets at renewals to come.

Pomeroy explained to Artemis; “This increase in CEA policies will result in an increased need for claims-paying capacity. The global reinsurance and capital markets currently provide nearly 40 percent of CEA claims-paying capacity, and our need for additional risk transfer will grow as we continue to cover more homes in California.”

The CEA has been a valued partner for the catastrophe bond investment market in years passed, sponsoring five cat bonds since 2011 and currently having $650m of cat bond risk capital outstanding, from its remaining two in-force cat bond deals.

Most recently the CEA sponsored the $250m Ursa Re Ltd. (Series 2015-1) and the $400m Ursa Re Ltd. (Series 2014-1).

Of course the CEA also works closely with ILS fund managers that provide full-collateral as they participate in its reinsurance program, so the actual amount of CEA risk ceded to the capital markets is higher than the cat bond figure alone.

However, the CEA had explained to Artemis earlier this year that “Cat bonds are hard to justify on a cost basis right now.”

With catastrophe bond investor demand still at a high, prices are likely near as low as they can go, so whether the CEA comes back to the cat bond market will depend on how competitive traditional reinsurers are willing to be and whether the CEA wants to maintain or increase the diversification of its claims paying ability using the capital markets.

It’s encouraging that the CEA is growing earthquake insurance penetration in California. With scientists estimating that there is a 99% chance of a magnitude 6.7 or greater earthquake in California in the next 30 years, the life of a typical mortgage, and most Californians living within 30 miles of an active fault, it’s clear to see that growing penetration of cover is vital in the state.

With reinsurance and ILS capital abundant and keen to assume more risk the CEA will be welcomed back to the market to satisfy its claims paying capacity needs. As risk transfer remains cheap the CEA may find it can pass on even more cost efficiency to consumers, helping to drive earthquake insurance penetration rates even higher in California.