The California Earthquake Authority’s (CEA) Governing Board took a historic step April 29 when it revised its financial structure for 2005 and obtained commitments from reinsurers to collateralize the first $300 million of the CEA’s 2005 reinsurance program.
Elaine Bush, Chief Executive Officer, said “the reinsurers’ agreement to collateralize a portion of the reinsurance program is unique and provides more security at a lower cost to CEA policyholders.”
The CEA negotiated $1.5 billion of reinsurance coverage and will benefit from a blended rate-on-line of 5.84 percent, a drop of more than fifty percent in the rate-on-line obtained for the CEA’s first year of operations in 1997, when the rate was 12.5 percent.
“This is a win-win for the CEA and for the reinsurance community,” said Tim Richison, CEA Chief Financial Officer and Director of Insurance Operations. “We will continue to work together to achieve fair pricing and terms on the CEA’s book of business.”
The agreement calls for the reinsurer to set up a trust account with a U.S. bank acting as trustee. Before Jan. 1, 2005 the reinsurer will deposit in the account U.S. treasury securities with a remaining maturity of no more than three years and with a market value of at least 105 percent of the reinsurer’s share of the Collateralized Reinsurance Contract Limit.
“By in effect putting cash in the bank, the reinsurance community will provide added security for CEA policyholders,” Richison said. “This action is a strong signal from reinsurers that they are strongly committed to meeting their obligations following a catastrophic event.” Richison noted that other organizations had attempted to purchase collateralized reinsurance but those attempts had failed.
Clark Kelso, CEA Board Chairman, congratulated the CEA on forging the money-saving agreement. “This is a very good transaction for all parties,” Kelso said.
To view the materials used in the discussion visit the CEA Web site by clicking on this link: http://www.earthquakeauthority.com/4-29-2004-GB-Attachments/GB4-29-2004AI-9.pdf.
Topics Reinsurance
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