A.M. Best Co. has assigned an initial Financial Strength Rating of A- (Excellent) to the California Earthquake Authority.
The rating reflects the unique role the CEA serves in ensuring that insurance coverage for losses associated with earthquakes is available to residential property owners in the state of California. The rating also recognizes the CEA’s excellent risk-adjusted capitalization and the extensive financial flexibility and risk protection that derives from its unique organizational structure and extensive reinsurance program. A.M. Best also views the organization’s exhaustive catastrophe modeling and sophisticated risk and financial management practices as positive rating considerations. These factors are critically important to the rating assignment, particularly given the specific risks inherent in the CEA’s business activities.
Partially offsetting these strengths is the concentration of the organization’s exposure to earthquake-related property losses in the State of California, as well as potential conflicts that could arise over time as a publicly managed insurer. In addition, A.M. Best notes that a relatively high degree of volatility remains inherent in the CEA’s business. Despite the extensive risk modeling conducted by the CEA, and on its behalf by several leading independent firms, catastrophic loss forecasts carry no guarantee of their ultimate accuracy.
Moreover, the CEA’s operating history has yet to include any substantial earthquake losses. As a public facility, the CEA accepts all qualified properties, which potentially exposes it to adverse risk selection and, therefore, inadequate pricing on some policies it issues.
The CEA was created by statutes enacted in 1995 and 1996 by the California legislature in response to 1994’s Northridge Earthquake and the ensuing decline in the availability of earthquake insurance. The enabling legislation for the CEA also recognizes that sound rates need to be maintained for the facility to be able to honor its future claims to policyholders. It currently maintains over 64 percent of the market share for earthquake coverage in the state.
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