CEA New Wants $100M Reinsurance Contract to Act Like a Cat Bond

Chris Westfall
Chris Westfall

Apparently the California Earthquake Authority (CEA) likes catastrophe bonds so much that it’s pushing its traditional reinsurance program to mimic the capital markets.

Staff at the CEA has proposed a new $100 million reinsurance contract that looks to combine “traditional reinsurance” with “key features” of its successful $600 million catastrophe bond program, according to a presentation given to the authority’s board of directors last week.

According to the presentation, staff at the CEA negotiated a $100 million traditional, 3 year reinsurance contract with a single undisclosed reinsurer. If approved by the board, the contract will run from September 1, 2012 through August 31, 2015 at an annual premium of $5.7 million, according to the filing.

The new contract is required after the CEA’s increased exposure following a summer long policy push, according to the documents.

But key for the staff in endorsing the new contract was structuring the traditional reinsurance contract to mimic a catastrophe bonds’ multiyear coverage, according to the presentation. In order to achieve that, the contract includes several provisions that allow both sides to reset the coverage and attachment points.

For example:

  • The contract would include a negotiated “reset” provision for deductible and premiums for the 2nd and 3rd years, which would allow the both the CEA and reinsurer to determine the dollar-value attachment point and the dollar-value exhaustion point.
  • The contract attachment point “drops down” in CEA’s coverage when losses in a one-year period but the one-year total loss is not sufficient to trigger a 100% loss to the reinsurance contract.
  • The attachment point for subsequent contract periods can also move up or down, depending on changes in the CEA’s policy-count and total exposure as well as any new earthquake modeling.

The push for a flexible, multiyear reinsurance contract follows the CEA’s successful pay in the catastrophe bond market with its Embarcadero Re program. The earthquake authority issued $600 million in bonds through the “transformer” structure in 2012.

“This is the first such transaction of this type,” the proposal states. “This transaction combines traditional reinsurance with a multi-year contract period that includes several of the key features of the CEA’s transformer-reinsurance contracts.”

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