CEA Plans to Fix What Isn’t Broken

The California Earthquake Authority has had some great shopping luck this year. According to a report from Insurance Insider, the state-backed residual market pool was able to buy a total of $4.51 billion in traditional reinsurance coverage during the January and April renewal periods for just $182.5 million, compared with the $189.1 million they spent in 2015 for $4.09 billion of traditional cover.

Despite that success, which also has been reported in recent years by state residual markets from Massachusetts to Texas, CEA officials disclosed they will be shifting some of their strategy away from reinsurance and toward revenue bonds, which the authority last issued in 2014. Despite the incredibly soft market for property catastrophe reinsurance, the CEA estimates it would save $3.1 million by issuing a $100 million bond at a 1 percent coupon, rather than a comparable amount of risk transfer with a 4.4 percent rate on-line. The authority plans to up its revenue-bond program from the current $310 million to a total of $500 million.

One could debate what sort of capital structure makes the most sense under these conditions, but what can’t be denied is that there is clearly plenty of appetite in the market for the kinds of risks the CEA has to transfer. Which is why there continues to be no need for legislation like H.R. 4947, the Natural Disaster Reinsurance Act. The measure – introduced in April by U.S. Rep. David Jolly, R-Fla. – proposes that the U.S. Treasury step into the breach to provide reinsurance to “eligible state programs.”

Whether the CEA itself would be eligible is a matter of debate. As the bill currently is worded, it appears the only actually existing state program that would be eligible is the Florida Hurricane Catastrophe Fund. Of course, if it were to pass, one would expect that to change quickly, with more state entities restructured to take advantage of coverages that transfers risk, not to the global reinsurance markets, but directly onto the backs of U.S. taxpayers.

And it isn’t as if the CEA hasn’t similarly sought legislation that would uniquely position it as the only entity in the nation eligible for federal support. In the 112^th Congress, the authority heartily endorsed the Earthquake Insurance Affordability Act, sponsored by Sens. Dianne Feinstein and Barbara Boxer, both D-Calif. That bill would have authorized the U.S. Treasury to guarantee up to $5 billion in loans to “eligible state programs” (read, “the CEA”) to finance claims payments following significant earthquakes.

The Feinstein-Boxer measure quietly went away, and one hopes a similar fate befalls the Jolly bill this term. Alas, what never seems to go away, no matter how much compelling evidence to the contrary, is the myth that global reinsurance markets are somehow not up to the task of taking on catastrophe risk.