California state insurer finds "unique workaround" to avoid paying for additional coverage
California state insurer finds “unique workaround” to avoid paying for additional coverage | Insurance Business Asia
Reinsurance
California state insurer finds “unique workaround” to avoid paying for additional coverage
Short-term sale would leave a gap, expected to be filled by more reinsurance
Reinsurance
By
Kenneth Araullo
The California Earthquake Authority (CEA), a state-managed insurer for homeowners, plans to issue $250 million in debt on July 8.
The notes, set to mature in November, are backed by policy premiums, with proceeds designated to bolster the insurer’s funds for claim repayments, according to a preliminary official statement.
This short-term debt issuance was described as an unusual move that will temporarily reduce the CEA’s available capital on its balance sheet. As of the end of March, the CEA had $20.5 billion in funds to pay claims, including $6.2 billion in available capital and $1.7 billion from partnering insurance companies.
According to a Bloomberg report, these partners can reduce their payments if the CEA’s available capital exceeds $6 billion for more than six months.
The CEA seeks to avoid additional reinsurance to keep costs down for homeowners. Prices for US property catastrophe reinsurance have doubled from 2018 to 2023 due to insurers repricing risk in response to climate change, according to a National Bureau of Economic Research paper.
The CEA was established after the 6.7 magnitude Northridge earthquake in 1994, which caused significant damage, leaving 57 people dead and thousands injured. In the quake’s aftermath, most insurers stopped offering new residential policies in Southern California, impacting the real estate market. The CEA provides basic residential property insurance to California homeowners.
The upcoming debt issuance is expected to save the CEA about $17 million, according to minutes from a recent board meeting. Members approved the debt sale of up to $300 million. The insurer plans to pre-fund an account for debt payments, while the borrowed amount will be used for claims, maintaining the CEA’s claims-paying capacity but reducing available capital by $250 million for four months.
A unique workaround
Christopher Grimes, Fitch Ratings’ primary analyst, described the strategy as a “unique workaround.”
He noted the CEA’s challenge of providing affordable coverage while managing capital effectively. Grimes added that the balancing act is necessary to keep costs manageable for homeowners.
The CEA has notably employed this strategy before, facing some opposition from its insurance partners. At a June meeting, Trudy Moore of United Services Automobile Association urged the board to reject the proposal, citing prolonged suppression of available capital.
California Insurance Commissioner Ricardo Lara, also a board member, stated at the June meeting that the bond program is “integral to the CEA’s maintenance of its claims-paying capacity.”
Fitch rated the new bonds F1+, its highest short-term credit rating. Grimes noted that from an investor’s perspective, the bonds are particularly safe because the money is already in the account.
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