California Wildfire Fund seeks reinsurance renewal, program expansion

The California Wildfire Fund, which was established last year to back some of the wildfire liabilities related to utilities operating in the state, will go back to the reinsurance market to seek a renewal and an expansion of its first program for 2020 and beyond.

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 caused by any of the utility company’s that participate in the fund.

At its launch, back in the third-quarter of 2019, the California Wildfire Fund went to market seeking reinsurance protection for liabilities related to the two utilities that joined it from the start, San Diego Gas & Electric (SDG&E) and SoCal Edison.

PG&E, the most wildfire hit and liable of the Californian electrical utilities, is set to join the Fund, but cannot officially do so and contribute capital until its bankruptcy reorganisation is completed.

While it had been reported that the California Wildfire Fund was seeking up to $2 billion of reinsurance protection from the off, this was always unlikely as when it launched with the two utilities as members its total capitalisation was just $4.7 billion.

That, plus the facts that wildfire risk models had not yet factored in the latest major wildfire events from late 2018, losses had been so significant from the California wildfire peril, utilities had been responsible for the most destructive fires, subrogation settlements had not yet happened and market capacity for retrocessional protection for the wildfire peril was severely dented, meant the approach to the reinsurance market was not an easy one last year.

The California Earthquake Authority (CEA) took on administrative responsibility for the Fund, including a mandate to acquire risk transfer and reinsurance from appropriate sources, while Guy Carpenter was given the reinsurance broker role.

The 2019 reinsurance procurement process was “challenged” a meeting of the California Catastrophe Response Council, the interim administrator group for the Wildfire Fund, was told.

Reinsurance providers lack of confidence in catastrophe models was said to be a key reason, following the very severe wildfire seasons experienced lately.

But the retrocession market’s introduction of much stricter exclusions and severe capacity limitations further reduced the number of reinsuers willing to support the Wildfire Fund’s first reinsurance purchase.

In the end, the reinsurance purchased, the amount of which has never been disclosed, was narrowed in terms of coverage so that it focused on third-party insured property damages coming from the two utilities that had joined the Fund last year. It’s likely the reinsurance was in the hundreds of millions of dollars at best, rather than the billions that had been suggested last year.

The reinsurance was all backed by traditional or fronted capacity, we understand, and had a term from September 10th 2019 through May 31st 2020.

The California Wildfire Fund is mandated to purchase reinsurance and risk transfer for the risks of those utilities that are covered by it, so as a result a renewal is anticipated and given the CEA’s expertise in procuring reinsurance and capital markets forms of coverage including catastrophe bonds, it’s likely that the insurance-linked securities (ILS) market will at least be approached to gauge its interest in participating.

It seems at this time that this may not include covering PG&E’s risks quite yet, as the utility is not scheduled to exit its bankruptcy reorganisation until later this quarter.

PG&E is still aiming to be ready to join the California Wildfire Fund by the end of June this year, although some expect it could take longer. This might mean that the Fund has to buy some reinsurance now, in time for the end of May expiry of its initial program, but then return to the market and top it up once PG&E has joined. Or it could have a small gap in coverage perhaps

For the 2020 reinsurance renewal for the California Wildfire Fund, a key consideration is increasing the durability of the fund and its claims paying capacity, which suggests that the program will be increased in size if possible.

Pricing and terms will be a key factor here, especially with reinsurance rate expectations on the rise generally across the marketplace at this time.

How much appetite there will be for an upsized California Wildfire Fund reinsurance program will depend on the modelling at this time as well, with some of the models having had updates for the peril in recent months and a lot more data now available on the recent fire years.

Also a factor is the utilities included, as SDG&E and SoCal Edison are considered some of the firms with more modern infrastructure and a better fire mitigation strategy. When PG&E joins it will be interesting to see how the reinsurance market reacts, given its experience with that particular utility which is known for having much older equipment in some fire-prone areas.

Key though will be price and the meeting this week mentioned this repeatedly, that reinsurance can add durability to the Wildfire Fund but only at the right price.

At too high a cost, reinsurance becomes a drag rather than as much of a benefit it seems.

However, as the California Wildfire Fund grows it will require more reinsurance, that is a given, so renewing the program presumably must happen and some reinsurance must be procured at whatever cost the market offers at this time.

In early May 2020 the CEA will begin a reinsurance procurement process with broker Guy Carpenter, holding marketing conference calls with potential reinsurance panellists, after which a submission will be distributed around mid-May.

By late May or early June the Fund administrators expect to be in a position to decide on a reinsurance structure for the renewal program, also deciding at that time whether to include PG&E or not.

Lead quotes will then be sought from reinsurance markets, after which appetite from followers will be sought and a tower constructed.

Whether that could include some ILS fund participation remains to be seen. A catastrophe bond perhaps seems unlikely at this stage, as that could require more work plus certainty on whether PG&E is to be factored in or not, to allow for the time it takes to issue.

But some ILS capacity could be involved on a fronted or rated basis, perhaps even fully collateralised.

With the CEA behind the reinsurance procurement process, the California Wildfire Fund will have access to much of the marketplace. So it is going to be interesting to see how the renewal is received and what type of reinsurance program is procured this time around to take the fund through the rest of 2020 and into 2021, maybe even beyond if multi-year cover is secured.