CEA reinsurance program hits new high at almost $9.6bn

The California Earthquake Authority’s (CEA) reinsurance program has reached a new record high in terms of size at nearly $9.6 billion, which is up almost $1 billion since the January renewals.

Helping in this growth is the successful issuance of two large catastrophe bond deals in 2020 so far, the $700 million Sutter Re Ltd. (Series 2020-1 & 2020-2) and just this month the $775 million Ursa Re II Ltd. (Series 2020-1).

Growth of the CEA’s earthquake reinsurance program is actually running a little ahead of its own forecasts it seems, as California’s not-for-profit residential earthquake insurer had been expecting its reinsurance needs to decline in 2020.

The CEA had forecast its reinsurance tower would shrink to as little as $7.1 billion by the end of 2020 on the back of a legislative change that would see it diverting funds to the states retrofitting needs, before growing again to $8.4 billion of reinsurance and transformer (or cat bond) risk transfer for the end of 2021, then $9.5 billion by the end of 2022 and further to $10.6 billion by the end of 2023.

But now, the reinsurance tower already sits back at almost $9.6 billion and both the reinsurance market and catastrophe bond market have seen the CEA’s use of their risk capital increase.

After the January 2020 reinsurance renewals, the CEA’s reinsurance tower grew to a new record size of almost $8.6 billion.

That consisted of $6.618 billion of traditional reinsurance, both collateralized and from balance-sheet reinsurance vehicles, as well as $1.975 billion of outstanding catastrophe bonds from the CEA’s Ursa Re program.

Now, after the two catastrophe bond issues this year, the outstanding cat bond component of the CEA’s risk transfer has grown to $2.525 billion.

At the same time, the traditional reinsurance component is up to $7.021 billion, as of mid-October 2020.

The reason for the continued growth of the CEA’s earthquake reinsurance program is that its exposure is on the rise.

The Authority expects its earthquake exposures to rise at around 8% per annum up to 2023, up from a 7% forecast it previously made.

This year, in 2020, the CEA’s exposure is rising at 10% and expected to end the year with some $578 billion of exposure in-force, up from $525 billion at the end of 2019.

By the end of 2023, the CEA’s exposure-in-force is predicted to be a huge $727 billion, which is again significantly higher than a previous forecast for $688 billion at the same time.

All of which points to a continued need for robust levels of reinsurance capital and an expectation that the catastrophe bond market will remain a significant component of the CEA’s risk transfer arrangements through the next few years.

At this time, the CEA has $19.3 billion of claims paying capacity, including the risk transfer program made up of reinsurance and catastrophe bonds.

With a new proposed revenue bond issuance of $300 million, that is expected to close in November 2020, the CEA’s claims paying capacity is expected to rise to more than $19.6 billion.