CEA weighs second-event funding for major earthquake scenario

The California Earthquake Authority (CEA) is reportedly evaluating the necessity of establishing a second-event funding tower to ensure its operational capacity is maintained following a potential major earthquake.

As Reinsurance News understands, the CEA Advisory Board has been deliberating on the potential need for backup financing and coverage, considering the possibility that a major earthquake could exhaust its entire claims-paying capacity.

According to the CEA, like all catastrophe insurers covering events of unknowable severity, it faces the inherent risk that an unusually large and damaging earthquake could result in policyholder liabilities so significant that the CEA Governing Board or the Insurance Commissioner may determine that it cease writing new and renewal earthquake insurance policies.

“Such a ‘terminal event’ for the CEA was an acknowledged possibility from the CEA’s inception, and the original CEA statute expressly provided for an orderly and equitable self-liquidation of the CEA’s business after such an event,” the CEA explained.

Thus, the Authority is exploring strategies to ensure its sustainability and continue supporting Californians with their earthquake insurance needs, even after a major or catastrophic earthquake. This may include risk transfer and reinsurance as part of the solution.

Back in November of 2024, it was revealed that the CEA’s reinsurance and risk transfer tower had contracted by a further 6% to $7.993 billion, as it opted to non-renew contracts to limit the amount of capacity in excess of its minimum 1-in-350 year level as policy count and exposure continues to fall.

The CEA aims to maintain a range of 1-in-350 years to 1-in-500 years of claims paying capacity, with the risk transfer component a key source of its funding each year.

Claims paying capacity across all sources amounted to $19.7 billion at September, 30th, 2024, but there’s concern that this could easily be eroded or completely depleted under severe California earthquake scenarios, hence the deliberations around second-event funding, which could be funded by in part by private reinsurance and also capital markets backed catastrophe bonds.

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