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.
- 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.”