The California Earthquake Authority (CEA) is pleased that ILS investors helped it to lock in a large slice of reinsurance protection at attractive pricing with its just completed $500 million Ursa Re Ltd. (Series 2016-1) catastrophe bond and may explore sponsoring additional cat bonds in 2017, its CEO told Artemis.
The insurance-linked securities (ILS) market and its investors has helped the CEA to well over $2 billion of catastrophe bond backed reinsurance protection, $1.85 billion of which it has directly sponsored. In addition the CEA has also utilised collateralised reinsurance cover from ILS fund managers as well, demonstrating the strong relationship the organisation has developed with the ILS market.
Its latest catastrophe bond, Ursa Re 2016-1, completed this week securing the insurer a $500 million source of fully collateralised reinsurance protection against California earthquake losses, structured on an annual aggregate and indemnity trigger basis.
It’s the largest single catastrophe bond issuance in the CEA’s history of using securitisation and the capital markets as a source of reinsurance cover.
CEO Glenn Pomeroy explained to Artemis that the insurer is pleased to have locked in this source of multi-year reinsurance cover at attractive pricing and with efficient execution from the capital markets.
“This single, large transaction allows CEA to increase its risk transfer through multi-year financing at the best possible price—which minimizes the potential for unexpected market changes to have a negative impact on CEA’s ability to adjust its claim-paying capacity,” Pomeroy told us.
As the CEA grows and increases its policy count, which is helping to increase earthquake insurance penetration in California, a state renowned for low uptake of coverage for this peril despite its high exposure to catastrophes, it needs increasing amounts of risk transfer to support its growth aims.
Pomeroy explained; “We introduced many new coverage choices in 2016 to help Californians find the earthquake insurance policy that is best for their needs and budget, and we’ve been working hard to encourage people to take another look at what CEA has to offer.
“As a result, we’ve seen a dramatic increase in CEA policies. CEA now has more than 923,000 policies in force, and we’re on track to more than triple our average annual growth rate of the last 10 years.”
Reinsurance and ILS investors are playing an increasingly important role for the CEA therefore, as the CEA seeks to maintain a strong and fully funded ability to pay claims in the event of a major earthquake striking California.
“Global reinsurance and capital markets are a substantial part of our claim-paying capacity, and as we enter our third decade of providing residential earthquake insurance in California, and we continue to grow and to innovate, we’ll have additional need for risk transfer to increase our capacity,” Pomeroy continued.
With the completion of this latest Ursa Re 2016-1 catastrophe bond the CEA now has an impressive $1.15 billion of in-force catastrophe bonds providing it with capital market investor backed reinsurance coverage. That takes the CEA to 7th in our leaderboard of catastrophe bond sponsors.
When catastrophe bond and ILS market conditions are conducive the CEA tends to come back to top-up its reinsurance cover, appreciating not just the pricing but the ability to lock-in coverage over multiple years while diversifying its sources of risk capital.
“CEA may even explore additional catastrophe bond cover in 2017,” Pomeroy said to Artemis, suggesting that if investor appetite for cat bonds remains high, which it is expected to do, the insurer may return to bulk up on reinsurance from the capital markets again in the not too distant future.