For now a third year in a row, the California Wildfire Fund is going without reinsurance or any form of risk transfer in 2022, as the market pricing on offer still does not meet the Fund’s goal of extending its durability.
The California Wildfire Fund continues to keep reinsurance and risk transfer on the table though, as of all the capital sources available to it for use in funding, “Risk transfer is the only one that is flexible and has the potential to significantly enhance the durability of the Fund depending on the structure and price.”
For now though, the reinsurance and risk transfer markets are not able to offer anything that the administrating team of the California Earthquake Authority find appealing, or additive to its capital and economic durability.
The California Wildfire Fund was established to provide a source of capital and capacity, to pay or reimburse eligible claims arising from a covered wildfire event that was proven caused by any of the utility company’s that participate in the fund.
Use of reinsurance, or risk transfer from the capital markets including catastrophe bonds, has always been in the California Wildfire Fund’s remit.
The Wildfire Fund is administered by the California Earthquake Authority, so an experienced team that has significant experience of buying a large reinsurance program, as well as a significant number of catastrophe bonds, leads the work of the California Catastrophe Response Council on risk transfer.
In 2019, soon after its launch the California Wildfire Fund did purchase a very small reinsurance program.
In 2020, the Wildfire Fund engaged with reinsurance markets around the mid-year renewals, but 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.
Then, in 2021, the Wildfire Fund 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.
Now, in 2022, the same has occurred, as it seems pricing remains too high for the use of reinsurance or risk transfer to be additive to the Wildfire Fund’s durability.
Insurance and reinsurance pricing for California wildfire risks has soared in recent years and coverage for wildfire liability for utilities especially so.
That’s not to say it can’t be purchased and the capital markets remains open to California wildfire risk in catastrophe bond form as well, albeit with pricing significantly elevated now.
In recent weeks we saw another Randolph Re 2022-1 private catastrophe bond, that we assume to be a renewal for Mercury Insurance.
That followed the Randolph Re (Series 2021-1) private cat bond for Mercury Insurance, while the wildfire peril also featured in a number of multi-peril cat bonds this year.
In 2021, we also saw a utility, the Los Angeles Department of Water & Power sponsor the Power Protective Re Ltd. (Series 2020-1) cat bond, and electrical utility Sempra Energy secured wildfire protection from the ILS market with its SD Re Ltd. (Series 2021-1) transaction.
So, coverage is available, but it all comes down to economics for the California Wildfire Fund it seems.
The Fund retains the services of a reinsurance broker and we’re sure is testing the market’s appetite for risk, but continues to find the pricing and structure of what is on offer unappealing and so did not engage with the market to buy protection again in 2022, the third year in a row that has happened.