CEA warns $3.5bn 1/1 programme 'may not be fully placed'
California Earthquake Authority's warning demonstrates the challenges facing buyers as they scramble to find capacity at the January 1 reinsurance renewals in what is seen by many as the hardest market for decade
World’s second-largest buyer of natural catastrophe reinsurance reveals October 1 programme not fully renewed and casts doubt on April 1 contracts as capacity challenges escalate
The California Earthquake Authority (CEA) has warned it may not be able to place fully its $3.5bn syndicated reinsurance placement at January 1, 2023 in a sign of the significant challenges buyers face at forthcoming renewals.
The warning came as the earthquake insurer, which is thought to be the second-largest buyer of natural catastrophe reinsurance in the world, revealed it was unable to secure enough capacity to renew fully its expiring October 1 syndicated reinsurance programme.
And the CEA said it will also struggle to place its $1.4bn reinsurance placement expiring on April 1 unless market conditions “turn quickly, which seems unlikely to happen”, according to minutes of a board meeting.
As a result, the CEA said it is “entirely possible” it will not be able to maintain its targeted minimum one-in-350-year claim paying capacity “perhaps as early as January 2023”, given present market conditions.
The CEA’s warning demonstrates the challenges facing buyers as they scramble to find capacity for the January 1 reinsurance renewals in what is seen by many as the hardest market for decade.
For instance, Axa is reported to be increasing the retention on its North American hurricane tower, while Covéa has been forced to reissue the firm order terms on its property excess-of-loss treaty, according to other reports.
The CEA said certain of its expiring private reinsurance layers “cannot be renewed at all, or will be renewed only at lower capacity and increased rates on line, owing to the capital concerns of reinsurers”.
The CEA, which is the largest buyer of natural catastrophe reinsurance in the US, intentionally staggers reinsurance contract expirations and uses multi-year agreements so only a portion of its total risk-transfer capacity renews and must be replaced at any given time.
But in recent years its ability to secure sufficient capacity at historic prices has been “increasingly challenging”, it said. This has resulted in the average rate-on-line increasing as capacity has become more constrained.
The challenges have been “significantly amplified” in 2022 on the back of economic conditions such as spiralling inflation and rising interest rates, coupled with the run of major catastrophe losses worldwide.
While the CEA’s programme has been loss-free for many years, the CEA acknowledged it is not immune to the effects of losses on other reinsurance programmes, “which greatly affect the worldwide capacity and availability of risk transfer, as well as its pricing”.
“In all likelihood, therefore, the dollar amount of risk-transfer capacity the CEA will be able to purchase in the near future will be reduced – but by how much or for how long cannot currently be known,” the CEA leaders concluded at the board meeting.
“Some reinsurers may be willing to provide additional capacity, but not at prices the CEA would be inclined to pay as it would result in very large premium rate increases for all CEA policyholders. Some reinsurers, on the other hand, may not have sufficient capacity to provide to the CEA regardless of price.”
“All of this means it is entirely possible the CEA will not be able to maintain the targeted minimum one-in-350-year level in the near future – perhaps as early as January 2023 - in the current market.”