CEA ups reinsurance & risk transfer by 15% to $6.33bn at 1/1

As of the 1st January 2017 the California Earthquake Authority (CEA) increased the amount of reinsurance and risk transfer that it benefits from by another 15% to reach a record high of just under $6.33 billion.

The California Earthquake Authority (CEA) has been steadily utilising increasing amounts of risk transfer capacity from both the traditional reinsurance and ILS or capital markets.

The growth has been rapid in the last year or so, as the CEA took advantage of attractive pricing of reinsurance and ILS capacity, with the program reaching $4.5 billion in size in April 2016 and then growing its coverage by another 20% to hit $5.4 billion by December of 2016.

Clearly the reinsurance market was conducive to increasing this even further at the January 2017 renewals, as the CEA added another $840 million to grow its risk transfer protection to a stunning $6.33 billion of traditional and alternative coverage.

Catastrophe bonds play a key role in this, with the CEA having $1.15 billion of reinsurance risk transfer supported by ILS investors and ILS funds through its three separate in-force catastrophe bond issues, placing the CEA in 7th place on our leaderboard of catastrophe bond sponsors.

The cat bond coverage, as a percentage of the total program, has shrunk slightly as the CEA turned to the traditional and collateralised reinsurance markets for its January placements.

We understand that the CEA may have increased its program even more in January, had the market supported its hunt for capacity, but still the growth achieved in its risk transfer positions the CEA with the most private market reinsurance capacity in its history.

Price is of course perhaps the most important factor deciding how much reinsurance and risk transfer the CEA can buy. Price was clearly attractive at the January renewals, helping the CEA to grow its program so significantly.

A clear view of just how much the price of California earthquake risk transfer has dropped in recent years is available by looking at premiums versus limits that the CEA has benefited from.

As recently as 2011 the CEA paid $201 million of premium for $3.05 billion of reinsurance and risk transfer. Fast forward just a few years and over 2016 the CEA paid $202 million of premium for its $5.488 billion of limit, a huge increase in coverage and improvement in cost efficiency of risk transfer.

The CEA has previously said that it may look to catastrophe bonds again in 2017. With recent cat bond issues pricing at very attractive levels it may be that the CEA can secure some additional coverage at attractive pricing, or at the least replace its cat bond that matures in December 2017 at a more cost-effective rate on line.