CEA is considering funding a second major earthquake scenario event

The California Earthquake Authority (CEA) is reportedly evaluating the necessity of constructing a funding tower for the second event to ensure it maintains its operational capacity in the wake of a potential major earthquake.

As Reinsurance News has learned, the CEA's advisory board has been deliberating the potential need for reserve funding 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 unknown severity, it faces an inherent risk that an unusually large and destructive earthquake could result in policyholder liabilities so large that the CEA Board or Insurance Commissioner may decide Stop writing new insurance policies. Renewing earthquake insurance policies.

“Such a CEA ‘terminal event’ has been a recognized possibility since CEA’s inception, and CEA’s original statutes expressly provided for the orderly and equitable self-winding up of CEA’s business following such an event,” CEA explained.

Therefore, the Authority is exploring strategies to ensure its sustainability and continue to support 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 CEA's reinsurance and risk transfer tower had shrunk by another 6% to $7.993 billion, as it chose not to renew contracts to limit the amount of capacity beyond the minimum 1-inch level. 350 years as the number of policies and exposure continues to decline.

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 being a major source of its funding each year.

The capacity to pay claims across all sources was $19.7 billion as of September 30, 2024, but there are concerns that this amount could easily be eroded or completely exhausted under severe California earthquake scenarios, hence the deliberations on financing the second event, which could be financed through part From private reinsurance as well as catastrophe bonds backed by capital markets.

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