CEA reinsurance & cat bond risk transfer shrinks to $8.2bn at Jan 1

The California Earthquake Authority (CEA) has seen the traditional reinsurance component of its risk transfer arrangements shrink further at the 1/1 renewals, according to the latest estimate from the insurer.

A forecast for the California Earthquake Authority’s (CEA) claims paying capacity at January 1st 2023 shows the overall reinsurance and catastrophe bond backed risk transfer component as having shrunk to $8.2 billion.

That’s down from just over $9 billion of reinsurance and cat bonds at November 1st 2022.

As we reported, the CEA was unable to secure all of the traditional reinsurance it wanted at its October 1st renewal, while the reinsurance it did renew at this stage was all placed at higher rates on line.

The hardening of the reinsurance market has resulted in an affordability issue, even for the very largest risk transfer buyers in the market.

The CEA’s risk transfer arrangements shrank further before the end of last year, as a $400 million catastrophe bond matured and was replaced with a new $305 million cat bond issuance.

That was still quite a result though, as it was the largest cat bond issued since hurricane Ian and showed the level of support the CEA has from cat bond investors.

Thanks to the multi-year nature of catastrophe bonds, the CEA still has $1.875 billion of cat bond backed reinsurance in-force, which puts it as the fourth largest sponsor in the market at this time, according to Artemis’ data.

But, on the traditional reinsurance side of the CEA’s claims paying capacity, the total secured had shrunk further by January 1st 2023.

The CEA had roughly $7.125 billion of reinsurance in-force as it moved into the final stages of its January renewal negotiations, it appears from the data available.

But, with total reinsurance and cat bonds falling to $8.2 billion at January 1st, while $1.875 billion is still in-force from catastrophe bonds, it suggests the traditional reinsurance share of the CEA’s risk transfer tower has now fallen to approximately $6.325 billion (based on the data we’ve seen).

Which means at Jan 1st cat bonds made up roughly 23% of the risk transfer arrangements the CEA had in-force, up from around 21% before the latest renewals.

While traditional reinsurance limit seems to have shrunk from roughly $7.125 billion pre-renewal, to around $6.325 billion at January 1st.

The CEA has another significant reinsurance renewal approaching at April 1st, when the insurer has around $1.4 billion of traditional protection up for renewal.

The CEA’s staff had anticipated a contracting risk transfer program and the insurer is looking into other levers that can help it reduce its claims paying capacity needs.

The staff anticipate hard reinsurance market pricing meaning it cannot secure as much protection as it wants, but still the multi-year nature of cat bonds continue to provide a level of continuity.

The next cat bond renewals are due in the summer, but given how reinsurance and cat bond capacity looks it is possible the CEA opts to try and secure more capital market protection prior to that.

Meaning, the ILS market could potentially increase its share of the risk transfer arrangements if pricing and available cat bond market capital can tempt the insurer back.