CEA Ups Reinsurance Over $200 Million, Taps Two New Firms

The California Earthquake Authority (CEA) has upped its reinsurance capacity by more than $200 million by increasing the allocation to nine companies, including two new reinsurance hires.

Despite success in finding new capacity, CEA chief financial officer Tim Richison says pricing remains difficult, and the state-sponsored quake insurer will look for ways to cut premiums in 2011.

“We were able to obtain [additional reinsurance] pretty quickly,” Richison says. “But I was not happy with the pricing at all.”

Richison says the staff of the CEA approached the board in August — after 2010 lines were already in place — once they determined the state-sponsored insurer “didn’t have enough reinsurance that was required for our financial security for next year.”

“We asked questions to see if anyone had additional capacity to allocate to us on our terms and conditions,” Richison added.

After the search, increases to the lines were approved at a board meeting last week.

Of the 59 reinsurers currently contracted with CEA, seven companies had their lines increased, with some companies doubling their exposure.

They include:
Ace Tempest Re (increased $20 million to $94,999,980)
AXIS Specialty
(increased $50 million to $100 million)
Harbor Point Re (increased $10,250,000 to $29,250,000)
Ascot [a Lloyd’s syndicate] (increased $4,945,000 to $39,445,000)
Munich Re America (increased $25 million to $50 million)
Odyssey America Re (increased $50 million to $100 million)
XL Re (increased $7.5 million to $79,750,058.)

In addition, two companies were added to the CEA’s reinsurance roster: Houston Casualty Company for a $11.5 million line, and a $25 million line was allocated to Muenchener Ruck – Germany.

The overall cost of increasing the existing lines was $202 million, according to CEA documents.

“Our rate was a fairly low rate-on-line [7.157 percent] even though it was less than one percent increase [in capacity],” he says. “However, it it was an overall 14 percent increase when it should have been the same amount or less than we paid in 2009.”

Richison says that the reason for the premium increase was the lag of the reinsurance community in the adoption of catastrophe model changes that would have cut CEA reinsurance costs significantly.

Last summer the U.S. Geological Survey made changes to its National Seismic Hazard Maps that theoretically cut potential losses from California quake. The USGS map often acts as the foundation for the work of the private catastrophe modeling firms.

According to CEA documents, models run by AIR and RMS showed “huge reductions” in potential losses for the authority. Those reductions were verified by the CEA’s primary modeling firm, EQECAT, documents reveal.

“Our situation has to do with new models had not been out long enough for the reinsurance community to analyze them,” Richison says. “Once the do, they are calculating a significant reduction in potential losses and pricing should fall during our next renewal.”

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