The California Earthquake Authority (CEA) didn’t come back to the reinsurance market at its typical October 1st renewal, allowing roughly $511 million of canopy to run out and it now expects to re-evaluate its risk transfer need on the January renewals, meaning a $215 million catastrophe bond will likely mature without renewal later this month.
As we reported earlier this month, the California Earthquake Authority (CEA) has begun to shrink its reinsurance and catastrophe bond backed risk transfer resources, as its policy-count and overall exposure level declines.
Having grown the chance transfer tower to only over $9.15 billion of limit at June renewals, the CEA then reduced the dimensions of the reinsurance portion of this system through non-renewals because it didn’t need as much protection, given the shrinking exposure base.
A big amount of reinsurance was allowed to run out without renewal at July thirty first, shrinking the tower 7% to roughly $8.5 billion.
As we said in our last article, the market was discussing additional non-renewals of reinsurance by the CEA at its October 1st renewal date.
It now transpires that $511 million more in traditional reinsurance was allowed to run out, reducing the general size of the chance tower to only over $7.99 billion at November 1st, based on the newest disclosure from the earthquake insurer.
That’s an additional 6% decline and now puts the tower greater than a billion dollars smaller than it was just back at June this yr.
At a board meeting of the CEA back in September, the dynamics which have affected its exposure were discussed.
The board heard that the CEA’s probable maximum loss on the 1-in-350 yr level has been declining at a faster pace that its reinsurance contracts have been coming up for renewal.
After the October 1st non-renewal of $511 million of reinsurance, the CEA is now expecting to attend until the January 2025 renewal to reassess its risk transfer needs.
The hope is that, by that stage and given the numerous non-renewals, the return period needs for risk transfer could have stabilised somewhat and a clearer picture of the go-forward reinsurance needs be available.
Nonetheless, this brings into query the long run of 1 catastrophe bond in the chance transfer tower because the CEA has a $215 million Ursa Re II Ltd. (Series 2021-1) cat bond that matures at the tip of November. It now seems unlikely we’ll see any renewal for this, in order that could possibly be an additional $215 million reduction in risk transfer tower size.
That would scale back the CEA’s risk transfer tower to roughly $7.78 billion from December 1st.
The following renewals, at the tip of this yr, sees the CEA with a big amount of traditional reinsurance contracts set to run out.
In total, single and multi-year reinsurance contracts amounting to only over $2.48 billion will run off-risk after December thirty first 2024 and it’s now questionable just how much of that the CEA might want to renew.
For some history, the CEA’s risk transfer tower had been as large as $9.6 billion around mid 2021, however the last time it was below $8 billion (because it is now) was right back in 2017.
The insurer has been adjusting its policy coverage terms to cut back risk lately, while the private market has also taken earthquake insurance share in California.
For 2025, the chance transfer strategy stays unchanged on the CEA, with a goal to have resources in place to cover between a 1-in-350 years to 1-in-500 years return period as its claims paying capability goal.
Once more, it will include traditional reinsurance and transformer risk transfer, or catastrophe bonds.
Right away, as of November 1st 2024, the CEA has just over $5.72 billion of traditional reinsurance in-force.
As well as, the CEA continues to have some $2.27 billion of outstanding catastrophe bond coverage still in-force right now, putting the CEA in third position in our cat bond sponsors leaderboard.
With the now expected maturity and certain non-renewal of the $215 million Ursa Re II Ltd. (Series 2021-1) catastrophe bond at the tip of November, that can reduce its catastrophe bond backed reinsurance to $2.055 billion, so still making up 26% of the overall nearly $7.78 billion at the moment.
But, how it will change after the 1/1 renewals stays to be seen.
The following catastrophe bond maturities are due next June 2025, totalling $245 million. But, in fact, the CEA could also opt to redeem cat bonds early, if further reductions in the chance transfer tower were needed.
Nonetheless, with cat bond coverage typically locked in for three-year terms or more, it seems more likely any further reductions for now will come on the 1/1 renewals, from its traditional and privately collateralized reinsurance arrangements.
Because of this, 2025 will probably be an interesting yr to look at the CEA’s risk transfer tower developments.
One other item of note from its upcoming board meeting in early December, the CEA can also be trying to expand the role of reinsurance broker Gallagher Re to to authorise additional monthly loss modelling activities.
Currently, Gallagher Re, performs the modeling for the CEA’s risk transfer program on a quarterly basis, but given the exposure decline the insurer feels this decrease within the CEA’s claim-paying capability requires “more focused and frequent monitoring.”
Because of this, the shift to monthly loss modelling is predicted to help in equipping the CEA, “to fine-tune its risk transfer program to higher reply to changing market conditions and follow the board approved risk transfer strategy, which could end in cost savings for the CEA and its policyholders by limiting any excess purchase of risk transfer,” the insurer believes.
Adjusting the service agreement with Gallagher Re to incorporate the monthly running of loss modelling output is predicted to cost an extra $400,000 per-year, taking aggregate annual fees paid to the reinsurance broker to not more than $4,600,000, the CEA’s board documents explain.
View details of each catastrophe bond sponsored by the CEA within the Artemis Deal Directory.