CEA’s reinsurance risk transfer tower shrinks again to $8.1bn

As the California Earthquake Authority (CEA) fast approaches one of its major reinsurance renewals for the year at April 1st, the earthquake insurer has seen the risk transfer program shrink a little further to just under $8.1 billion by January 31st.

One of the world’s largest reinsurance buyers and also a significant catastrophe bond sponsor, the California Earthquake Authority (CEA) has been dealing with stresses related to risk transfer affordability in the current hard market and higher priced environment.

This has been an issue for a number of months now and as a result the CEA’s risk transfer and reinsurance tower has been shrinking.

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.

As a result, the CEA’s risk transfer tower had shrunk to just over $9 billion at November 1st 2022, down from just under $9.3 billion of reinsurance and cat bonds at May 31st 2022, and $9.44bn at December 31st 2021.

The January 2023 reinsurance renewal was no kinder and the CEA came out the other side of that with around $8.2 billion of reinsurance and risk transfer, of which catastrophe bonds contributed $1.875 billion and traditional reinsurance of roughly $6.325 billion.

But we’ve now learned the risk transfer tower at January 31st 2023 was a little smaller again, at just under $8.1 billion, with the same $1.875 billion of still in-force multi-year cat bonds, but traditional reinsurance down again at just under $6.22 billion.

Which means catastrophe bonds made up more than 23% of the CEA’s risk transfer arrangements at January 31st 2023, which is one of the highest proportions we’ve seen.

Now, the CEA faces the task of renewing $1.4 billion of expiring traditional reinsurance at April 1st, after which there are $335 million of catastrophe bonds maturing at May 16th, then a further $27.5 million of reinsurance expiring at May 31st, $150 million at June 21st, $65 million at June 30th, and then $556 million at July 31st.

Given the still-challenging reinsurance environment and higher pricing in the cat bond market, the CEA is going to have an affordability balancing-act to pursue over the coming months and it will be interesting to see how the risk transfer tower evolves as a result.

Should the cat bond market prove conducive, in terms of pricing and securing significant limits, then we could see the CEA continue to grow the cat bond share of the tower.

But, if traditional reinsurers’ appetites recover, the balance could shift back towards more reinsurance protection in the CEA’s tower.

Recently, the California Earthquake Authority (CEA) had its ratings downgraded because its claims paying capacity has been reduced, with lack of reinsurance one of the driving factors.

At some stage the risk has to be covered, sufficiently to sustain adequate ratings, so decisions over exposure levels, versus available and affordable protection, will have to be made.

View the details of more than $6 billion of catastrophe bonds sponsored by the CEA in the Artemis Deal Directory.