For the second year running the California Wildfire Fund has shied away from buying reinsurance or any form of risk transfer, saying that current market pricing means it isn’t economically worthwhile to extend the Fund’s durability.
However, importantly, the California Wildfire Fund acknowledges that risk transfer remains in its sights, saying that of all the capital sources available to use as funding, “Risk transfer is the only one that is flexible and has the potential to significantly enhance the durability of the Fund.”
Although at the same time, the Fund explained that this is, “depending on the structure and price.”
A year ago, we reported that after the California Wildfire Fund had engaged with reinsurance markets around thee mid-year renewals, it found that the quotes received did not deliver on the pricing and structure it was seeking, resulting in the potential purchase of risk transfer for the 2020 wildfire season not being completed.
The same (or similar) has happened again in 2021, it seems.
Recall that, the California Wildfire Fund was set up to provide a source of capital and capacity, to pay or reimburse eligible claims arising from a covered wildfire event that was deemed caused by any of the utility company’s that participate in the fund.
Buying reinsurance, or risk transfer from the capital markets including catastrophe bonds, was always in the Wildfire Fund’s remit.
Administered by the California Earthquake Authority, the Wildfire Fund has access to an experienced team that leads the work of the California Catastrophe Response Council on risk transfer and has experience of buying a large reinsurance program, as well as a significant number of catastrophe bonds.
Back in 2019, the California Wildfire Fund did purchase a small reinsurance program, but the chance to renew and extend that was turned down in 2020 as it found market pricing was uneconomical for its needs.
Now, the wildfire liability stricken utility PG&E has joined the California Wildfire Fund, alongside its other members San Diego Gas & Electric (SDG&E) and SoCal Edison.
So you’d imagine that with the amount of risk needing to be covered much higher now, this might have led to more appetite to tap reinsurance and capital markets in 2021?
But again, pricing and terms mean that the Wildfire Fund has decided against buying reinsurance or risk transfer for this wildfire season.
Around the 2021 renewals, we’re not sure how formalised a process the California Wildfire Fund might have followed, along with its reinsurance brokers, as in whether they actually approached markets for quotes or not, or simply deemed that conditions in the market hadn’t noticeably improved.
Either way, the Fund said that its, “Administrator staff determined that the pricing and structure did not sufficiently meet the goal of enhancing the Fund’s durability and did not engage the market for a risk transfer program for the 2021 wildfire season.”
The Fund also said that its, “Current claim paying capacity is sufficient without additional risk transfer. At current market prices, risk transfer will not materially extend durability. The CEA employs expert staff that will continue to survey the risk transfer markets and monitor pricing as those markets evolve.”
As reinsurance rates have continued to firm at the renewals, while wildfire insurance rates also hardened in 2021 again, it seems likely that when the California Wildfire Fund does deem it the right time to access sources of risk transfer, it could well look to insurance-linked securities (ILS) and catastrophe bonds to make up part of the tower.
The capital markets have shown a willingness to take on some California wildfire risk in recent months, most recently with the Randolph Re (Series 2021-1) private cat bond for Mercury Insurance, while prior to that we saw the wildfire peril feature in numerous multi-peril cat bonds this year and utility the Los Angeles Department of Water & Power sponsor the Power Protective Re Ltd. (Series 2020-1) cat bond last December.
We also saw utility Sempra Energy secure wildfire protection from the ILS market with the SD Re Ltd. (Series 2020-1) in 2020.
So it does seem there is catastrophe bond capacity available, albeit perhaps not at the pricing the Wildfire Fund’s Administrator’s would have liked to see.
It’s also possible the Fund doesn’t yet need the volume of risk transfer that would make a visit to the catastrophe bond market viable for it.
The California Wildfire Fund is also currently aware of the potential for it to face a claim if losses from two previous season wildfires increased, as it is exposed to the 2019 Kincade and 2020 Zogg wildfires.
It said that if the liability for the Kincade fire reached above $1 billion, then PG&E would be eligible to make a claim on the Fund.
However, it noted that reported losses in aggregate across the three utilities have not reached a level where any claims are expected from these wildfires and its modelling suggests the Fund will remain untouched by these prior season events.
With the 2021 wildfire season underway and numerous fires already burning in California, the Fund said it will be monitoring activity closely.
Whether reinsurance rates will ever come down significantly for the California wildfire peril remains to be seen.
It’s possible that economies of scale may help, in relation to the California Wildfire Fund’s ambitions to secure risk transfer, as the more exposure it holds, the greater the program it could need to purchase and at that stage catastrophe bonds and other instruments could help to make reinsurance more viable.