California disaster insurance & alternative risk transfer bill passes Senate

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The California legislation to enable the state to purchase insurance, reinsurance, insurance-linked securities (ILS), or other alternative risk transfer (ART) products to help pay costs resulting from natural disasters, has now passed the Senate in a unanimous vote.

California flag mapBill SB 290 had already passed key Senate committees and went to the main floor on May 23rd, resulting in a vote of 38 to nothing to continue the disaster insurance bill on its way to becoming enshrined in law.

There still haven’t been any amendments to the bill, meaning the text remains in its initial state and as its authors intended.

SB 290 was introduced by Senator Bill Dodd, D-Napa, and co-sponsored by Insurance Commissioner Ricardo Lara and Treasurer Fiona Ma.

If passed, California could become a purchaser of ILS or catastrophe bonds, in order to transfer some of its exposure to losses from disaster events including earthquake, wildfires and flooding.

Utilising ILS and catastrophe bonds, or traditional insurance and reinsurance capital, as financing structures to secure capital that could be used in the event of a major disaster is increasingly coming up in political circles.

It would remove some of the burden that disasters can cause off the state and taxpayers, while also providing capital that can pay out rapidly to assist in disaster recovery efforts, if structured to use a parametric trigger of sorts.

Contingent disaster risk financing capital can help states and governments to become better prepared to respond to major disasters, better protecting their people while also removing some of the need for tax hikes to recover their costs.

Commenting on the passage of the bill, Senator Dodd said, “As climate change continues to contribute to devastating infernos, we need a strategy to reduce the pressure on our state budget. This bill would do just that, allowing the state to invest in an insurance policy to ensure budget predictability and reduce taxpayers’ exposure to increasing costs associated with disasters, especially wildfires. That savings and predictability would allow us to allocate more resources to wildfire prevention and mitigation efforts.”

”Right now taxpayers are on the hook when the costs of fighting extreme wildfires go over budget, as they have in eight of the last ten years,” added Insurance Commissioner Lara. “Having insurance for our state budget against unexpected disaster costs can reduce the likelihood that California will have to trade off on other priorities, take on debt, or draw from rainy day funds in the future.”

“Today’s action brings us one step closer to giving the governor, myself, and the insurance commissioner the ability to purchase insurance, reinsurance, insurance-linked securities, and other alternative risk transfer products to help pay costs resulting from natural disasters,” Treasurer Ma explained, adding “It makes good financial sense to do this.”

California has paid out roughly $947 million in 2017 and 2018 through its emergency fund for firefighting, which is almost $450 million beyond its budget, according to authority Cal Fire.

The costs of fighting wildfires have exceeded Cal Fire’s emergency budget in seven of the last 10 years, reflecting the growing costs even in less severe wildfire seasons.

Costs such as these can be transferred to reinsurance and capital markets investors through ILS structures, or more traditional insurance products, if the risk has been accurately quantified and priced to be commensurate with it.

This bill could also see disaster risk transfer bought by California for earthquake risks and flooding as well.

With earthquakes in particular, the potential costs that the state of California would be burdened with following a major event would be especially significant, hence the capital markets and a parametric catastrophe bond would prove a useful financial buffer that could pay out the moment a major earthquake disaster struck the state.

If the bill passes, any California Disaster Insurance that was purchased is expected to be paid for from state available funds, the lawmakers said.

The bill moves on to the state Assembly.

More details on the proposals can be found in a previous article here.

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