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CEA could shrink reinsurance program after struggling to secure cover

6th December 2022 - Author: Matt Sheehan

The California Earthquake Authority (CEA), one of the world’s largest insurers of residential earthquake cover, has warned that it will likely be forced to reduce its reinsurance program in the near future, after struggling to secure ample capacity at renewals this year.

california-earthquake-auth-cea-logoIn a board meeting this week, leaders at the CEA reported that they were unable to secure enough reinsurance capacity to fully renew their expiring October 1 reinsurance program.

And looking ahead, they said that certain private reinsurance layers coming up for expiration cannot be renewed at all, or will be renewed only at lower capacity and increased rates on line, owing to the capital concerns of reinsurers.

The CEA is generally thought to be the largest buyer of natural catastrophe reinsurance in the US and the second-largest in the world, meaning that changes in risk transfer market conditions affect it acutely.

And this year has given rise to particularly challenging conditions, partly due to general economic issues such as inflation, which have increased costs for consumers and for businesses, including reinsurers and other risk transfer participants.

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Additionally, a string of major catastrophe losses worldwide in recent years, as well as the COVID pandemic, have caused the risk transfer market to suffer several years of major losses, decreasing both the availability of risk capital and some reinsurers’ and ILS investors’ risk appetites and philosophies.

“Thus, as 2022 has progressed, so have the headwinds the CEA has faced in securing an amount of risk transfer sufficient to satisfy the Board’s newly-adopted target minimum claim-paying capacity of a 1-in-350-year level, and especially so later in the year,” board members noted at the meeting.

Despite these headwinds, the CEA risk transfer team says it has succeeded to date in meeting the targeted minimum claim-paying capacity of 1-in-350-years, helped by the CEA’s program design which intentionally staggers reinsurance contract expirations and uses multi-year agreements so that only a portion of the CEA’s total risk transfer capacity renews and must be replaced at any given time.

As the market conditions continue to harden, however, the CEA acknowledges that “there is no guarantee” that it will be able to continue to meet this minimum target.

The January 2023 renewal period, for instance, which represents the CEA’s largest syndicated placement, seems likely to face challenges to replace the expiring limit given current market conditions, even though it will be placed at a significantly higher rate-on-line than the expiring January 2022 program.

And unless market conditions turn quickly, which seems unlikely to happen, the CEA also accepts that its next largest program of $1.4 billion of expiring capacity is likely to have similar results at the April renewals.

“In all likelihood, therefore, the dollar amount of risk transfer capacity the CEA will be able to purchase in the near future will be reduced—but by how much, or for how long, cannot currently be known,” the CEA concluded.

“Some reinsurers may be willing to provide additional capacity, but not at prices that the CEA would be inclined to pay as it would result in very large premium rate increases for all CEA policyholders. Some reinsurers, on the other hand, may not have sufficient capacity to provide to the CEA regardless of price. “

“All of this means that it is entirely possible that the CEA will not be able to maintain the targeted minimum 1-in-350 level in the near future—perhaps as early as January 2023— in the current market.”

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