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CEA expects 2018 risk transfer pricing will be at lower end of the scale


The California Earthquake Authority (CEA) anticipates seeing pricing for its risk transfer program, made up of reinsurance and transformer catastrophe bonds, that is at the “lower end of the pricing scale” which will help it to maintain its claims-paying capacity for 2018.

The not-for-profit residential earthquake insurance provider for California expects that reinsurance capacity in both the traditional and capital markets will remain strong and well capitalised, which it believes will allow it to continue to purchase coverage at the lower end of the pricing scale in 2018, while still securing the necessary capacity it desires.

As of November 1st 2017 the CEA had over $7.5 billion of reinsurance and catastrophe bond risk transfer in-force.

That figure jumped yesterday with the completion of its latest catastrophe bond, a $400 million Ursa Re Ltd. (Series 2017-2) transaction, that saw its pricing settle at attractive rates, although the coupon appeared to settle very slightly above other recent Ursa Re cat bond deals, likely reflecting the fact that ILS investors have faced heavy losses from recent catastrophes.

But despite any general increase in reinsurance rates that may be expected, the risks the CEA transfers are not loss-affected and so the availability and price of reinsurance should remain attractive, while catastrophe bond investors show no signs of losing their appetite for more risk.

In 2017 the CEA entered into 16 new reinsurance and cat bond contracts, 8 of which were multi-year and so locked in pricing at the recent low levels and the CEA notes that this provided “uninterrupted, long-term financing at lower prices.”

“Multi-year contracts reduce the risk that a single year’s market conditions would prevent CEA from obtaining risk-transfer capacity at suitable pricing, on favorable terms,” the company said.

$1.325 billion of catastrophe bond risk capital was issued in 2017, thanks to the $925 million Ursa Re Ltd. (Series 2017-1) and the just completed $400 million cat bond deal.

Looking ahead for 2018, the CEA is advised by its staff to pursue a risk transfer strategy consisting of both traditional reinsurance and transformer or cat bond coverage, with the goal of maintaining its claims-paying capacity across the year.

The CEA plans to shift to a new earthquake risk model, to take advantage of the latest science, but will still aim to maintain its claims-paying capacity at no less than a 1-in-400-year level and no greater than a 1-in-550-year level.

When approaching the risk transfer markets in 2018, the CEA staff will aim to, “Obtain the most advantageous pricing and contract terms (extending over multiple years, as appropriate), accessing both the worldwide reinsurance market and the other capital markets that provide reliable risk-transfer.”

The CEA has increased its budget for risk transfer for 2018 very slightly from its mid-year 2017 adjusted budget amount, with $315.6 million set in the budget for spend on reinsurance and risk transfer arrangements in 2018, up from $312.8 million.

It’s expected that the CEA will continue to use the most attractively priced coverage available to it, in a mix of reinsurance and catastrophe bonds so that it benefits from diversity among its risk transfer counterparties.

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