The California Earthquake Authority (CEA) is still expecting that its use of reinsurance and risk transfer capacity will grow in the coming years after a slight decline if a legislative change is approved, while right now the percentage of the CEA’s program that is collateralized stands at 34%.
The CEA expanded its reinsurance program to its largest ever at $8.331 billion at the January renewals this year and then after the April renewals the size remained relatively flat at $8.319 billion.
At the same time recent reinsurance renewals for the CEA have been at relatively flat rates, providing another indicator that reinsurance perils that have not faced losses have not seen the rate increases experienced elsewhere, a further sign of rational pricing and that we are not in a market-wide hardening, even for property catastrophe risk.
The CEA maintains a significant chunk of multi-year reinsurance protection after its April renewal, with an impressive 67% or $5.6 billion of the program providing multi-year coverage.
The program is structured across 38 risk transfer contracts, including the transformer catastrophe bond layers provided through the Ursa Re vehicle.
The catastrophe bonds make up $2.075 billion of the reinsurance that the CEA benefits from, putting the insurer third still in our chart displaying catastrophe bonds & ILS outstanding by sponsor.
But more impressive is the fact that collateralized reinsurance coverage has now grown to make up 34%, or over $2.83 billion of the protection the CEA has in-force, as it has tapped ILS funds for participation in the traditional layers of its risk transfer program as well.
There has been some discussion of whether the CEA would now shrink its reliance on reinsurance permanently, or shy away from the reinsurance market. But this isn’t an accurate representation of the dynamics at play.
As we’ve explained previously, the CEA said that even based on a modest rate of projected premium growth, it would need to increase its claim-paying capacity from $17 billion to as much as $48 billion of financing and risk transfer.
Today the entire claims paying tower, including the $8.319 billion of reinsurance, is only $17.447 billion in size, suggesting enormous growth in the financing and risk transfer needs of the CEA over time.
While the reinsurance tower could shrink next year, if the proposed legislative changes pass, with adjusted financing to suit that, perhaps by as much as $1.3 billion, this is only anticipated to be a temporary buying blip from the CEA and the earthquake insurer believes it will need much more in risk transfer and reinsurance over time.
Again, we’ve explained before that the CEA expects that by the end of 2021 it will need $8.4 billion of reinsurance and transformer (or cat bond) risk transfer, so more than it has today, which is expected to rise further to $9.5 billion by the end of 2022 and again to $10.6 billion by the end of 2023.
Speaking with Artemis, Glenn Pomeroy the CEO of the CEA said,”Even if the legislative proposal were adopted this year, and a new layer of “contingent capital” was placed in our claim paying capacity tower next year, we would still be a very significant purchaser of reinsurance – both next year and going forward.
“Given our current exposure growth rate, we would have made up for that momentary drop in reinsurance capacity over the course of the following 12 to 16 months.”
Continuing, “Reinsurance, both from the traditional and capital markets, will continue to play a very important role in CEA’s management of our risk.
“But we believe it is vitally important that we continue to look for ways to diversify our risk transfer portfolio in order to allow us to continue to grow as rapidly as possible, while at the same time shifting a portion of our expenditures to the funding of pro-active seismic mitigation measures for older, more vulnerable homes in California.”
Pomeroy highlighted the important role that he feels the CEA has in helping Californians become more resilient to the next earthquake of size, something that can only be achieved with robust financing behind the Authority, a decent portion of which is likely to be reinsurance based, be that traditional or alternative.
“We need to close the California earthquake protection gap from both directions – insuring more homes with affordable, valuable earthquake insurance, while at the same time actively promoting risk reduction through residential seismic mitigation,” Pomeroy closed.
While no insurer’s reinsurance demand can be relied upon to be endless, the CEA given its projections for growth in exposure and as a result funding needs, is likely to be one of the larger risk transfer buyers in the market for some years to come.
With the CEA’s reinsurance program already 34% collateralized, 24% through catastrophe bonds, it seems the capital markets will continue to have an important role to play in protecting California’ homeowners.
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