CEA Likes Catastrophe Bonds, Just Don’t Call It a “Sponsor”

Guidelines set up by the California Earthquake Authority (CEA) for its catastrophe bond program give broad authority to a newly created “Alternative Risk Transfer Advisory Subgroup” to expand its over $600 million program while at the same time eschewing having the state-backed program called cat bond “sponsor.”

Minutes from a recent board meeting show that a newly created “ART Subgroup” will oversee the CEA’s catastrophe bond and collaterlized reinsurance program. The group — made up of the CEA’s CEO, CFO, general counsel and staff — will have responsibility for “approving the structural and pricing terms of, and any publicity in connection with, each Alternative Transaction,” the presentations states.

The group will need to consider several factors when approving new transactions, including economic reasonableness and furthering “CEA’ s claim-paying capacity.”

The guidelines also set out specific “Preferred Terms for ILS Transactions,” including collateral requirements and fee guidelines. Specifically, the terms also call for “one or more optional extension periods” for any transaction with the “aggregate of all extension not exceeding 18 months.”

“In describing these preferred terms, it is expressly understood that the ILS market continually evolves and different reinsurance structures may, be desirable to the CEA depending on pricing, the CEA’s needs and other factors,” the minutes state.

Oddly, the CEA gets very specific regarding publicity regarding its catastrophe bond program in order to make sure public perception that it isn’t considered a catastrophe bond “sponsor.”

“Statements implying that the CEA has or had ultimate authority over any ILS Transaction or undermining the reinsurer’s independence or ultimate authority should be avoided,” the documents say. “For instance, the CEA should be careful to describe the CEA’s role in an insurance-linked securities transaction from the perspective of an insurance company purchasing reinsurance and not as the “sponsor” of the transaction or the “issuer” of the insurance-linked securities.”

The CEA also calls for the staff to require “any reporter with whom an interview has been granted to submit a draft of the article for review as a condition of access to CEA officers and employees.”

The state-backed California program has sponsored $600 million in catastrophe bonds through its Embarcadero Re program, with another $52 million through Solidum Re Eiger IC Limited.

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