CEA to keep risk transfer target stable in 2021, Q1 cat bonds possible

The California Earthquake Authority’s (CEA) reinsurance program has shrunk slightly in the last few weeks, as $400 million of Ursa Re catastrophe bonds matured. But the Authority is aiming to keep its risk transfer target stable for 2021, suggesting more catastrophe bond issues are possible early in the new year.

The CEA’s reinsurance and catastrophe bond risk transfer program reached a new high at almost $9.6 billion in size in October 2020, as the organisation maintained its minimum coverage target throughout the year of being financed for a 1-in-400 year loss event.

Its claims paying ability provided by reinsurance and cat bonds has now shrunk somewhat with the $400 million maturity and the risk transfer program now down at almost $9.15 billion as of December 2020.

But the CEA is intending to stick with a target to cover a minimum of a 1-in-400 year event, suggesting it will be back in the catastrophe bond market before long as more coverage has to be renewed.

The CEA is in the market right now for a renewal of certain layers of its traditional reinsurance program, also talking with ILS and collateralized markets we understand.

At the end of December, some $2.25 billion of reinsurance limit matures from the CEA’s program and we understand a significant proportion of this is likely to be renewed soon, with more perhaps secured in Q1.

The CEA’s program tends to fluctuate, as renewal timings change and multi-year coverage terms end.

We’re told there is a chance of a new CEA catastrophe bond launching to the market soon, potentially even before the end of the year, which may occur once it has firm order terms on its traditional reinsurance placement.

For 2021, the CEA is expected to continue using a mix of traditional reinsurance and catastrophe bonds to fill its program needs and maintain a target 2021 claim-paying capacity that sits at no less than a 1-in-400 year level and no greater than a 1-in-550 year level.

The CEA’s policy count remains at near all-time highs and further growth is expected, which with the target to maintain a certain level of claims paying ability through risk transfer, cat bonds and reinsurance, suggests the overall protection program size will expand again next year.

While funding sources may also adjust, reducing the need for risk transfer slightly at times and changing the mix between reinsurance and cat bonds, the continued expansion of the CEA and its ambition to continue tapping both reinsurance and capital markets, should mean we see more Ursa Re cat bonds before too long.

The CEA’s exposure has been rising at roughly 10% this year and so it was forecast 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 forecast to rise significantly to a huge $727 billion, suggesting the need for reinsurance and catastrophe bonds is only going to increase, as its target for coverage remains relatively stable.