Rates on California quake remain thin despite seismic activity

Rates for California earthquake coverage are placing pressure on risk adjusted returns for reinsurers operating in the state, in spite of recent seismic activity.

That is the word from Doug May, executive vice president at Willis Re, who tells Bermuda:Re that while California pricing has largely tracked the downward reinsurance pricing trend of the last few renewal cycles, earthquake is being increasingly bundled in multi-peril programmes.

This has led to a reduction in the number of “pure” California earthquake programmes—with “many of these layers now subsumed into multi-peril programmes”—meaning reinsurers have had "room" for additional California earthquake business for some years, says May. This has led to downward pressure on rates in the state.

At the same time, the significance of California earthquake exposures has declined. As May explains, “California exposures used to make up a bigger percentage of reinsurers’ portfolios and we believe they have declined, relative to US hurricane risk.”

While its relative position within the portfolio may have declined, California earthquake remains an important diversifier to reinsurers’ wider portfolio, says May, one that means that such risks are considered “very attractive to reinsurance carriers”.

Regarding the take-up of re/insurance coverage in the state, May says that despite falling pricing in the California reinsurance market, there has been a steady decline in insurance take-up since the 2008 housing crisis.

“At present, we believe that the take-up rate for carriers that do not participate in the California Earthquake Authority (CEA) can be below 5 percent, with (CEA) participants at much higher take up rates.”

It seems that an incremental introduction of additional private solutions to augment the CEA will face considerable difficulties. Overturning the dominance of public solutions in a state with a reported 15 percent take-up rate for insurance will be no mean feat.

For further details on the recent Eureka earthquake click here.