The California Earthquake Authority (CEA) plans to transfer $3.283 billion in earthquake risk to the reinsurers and the capital markets in 2012, according to recently released proposal.
The CEA also indicated that it will use it’s recently launched Embarcadero Re transformer catastrophe bond for a significant portion the risk as it shifts it focus away from traditional marketplace.
“Historically, the CEA has relied heavily on reinsurance — predominantly, traditional reinsurance — for approximately one-third of its total claim-paying capacity,” a board memo released las t week states. “With the recent, highly successful transformer-reinsurance transaction completed, however, the CEA has access to the capital markets for risk transfer, which means an additional strong source of claim-paying capacity and risk transfer, going forward.”
In July the CEA issued $150 million, three-year transformer catastrophe bond arranged by Deutsche Bank under Embarcadero Re.
The CEA proposal said that an additional $163 million capital would be needed next year over 2011’s $3.12 billion risk transfer outlay because of recent legislation requiring the agency to run off a large chunk of its “industry assessment layer” (IAL).
The IAL is funded by levies on carriers, but a law passed earlier this year requirers that the publicly backed insurer reduce the layer by 5 percent annually.
In discussing the need for capital, CEA executives extolled the Embarcadero deal, adding that the traditional reinsurance was not the best choice given that “a large piece of CEA’s reinsurance premiums paid pass directly to offshore reinsurers.”
“The nature of catastrophe reinsurance is that the capacity it affords is purchased, but it is rarely used, given the low-frequency, high-damage events that catastrophe insurance is designed to cover — this mirrors the CEA’s experience to date,” according to the memo.
The CEA has paid nearly $2.9 billion in reinsurance premium for an average annual reinsurance capacity of over $2 billion, but has received “just” $267,457 in reinsurance loss recoveries, according to agency document.
The agency as total of $9.8 billion of claims paying capacity, according to the memo.