Quotes received from the reinsurance market at the mid-year renewals did not deliver on the pricing and structure that was sought for the California Wildfire Fund, resulting in the purchase of risk transfer not being completed.
As we explained back at the end of April, the California Wildfire Fund had engaged with the reinsurance market in recent months in an attempt to secure 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.
Buying reinsurance, or risk transfer from the capital markets including catastrophe bonds, was in the remit of the Wildfire Fund and with employees of the California Earthquake Authority’s risk transfer team heading up the work of the California Catastrophe Response Council on risk transfer, the Fund had the contacts necessary to upsize on its coverage.
The California Wildfire Fund did purchase a small reinsurance program in 2019 in the end, but only to cover risks of the two electrical utilities that joined it from the start, San Diego Gas & Electric (SDG&E) and SoCal Edison.
For 2020, the renewal approach that was made to the reinsurance market was again only for San Diego Gas & Electric (SDG&E) and SoCal Edison, as wildfire stricken PG&E only exited bankruptcy on July 1st and so has only now joined the Fund.
However, despite only looking for coverage for the two utilities risks, the Fund found pricing and terms unattractive for its needs and so it has elected not to purchase any reinsurance or to renew its program at this time.
The California Wildfire Fund administration team from the CEA and their reinsurance broker Guy Carpenter presented the potential renewal placement to reinsurers around the middle of June.
In total they presented to over 200 representatives of some 50 reinsurers from around the world, with the presentation laying out a reinsurance program with similar terms to the 2019 Wildfire Fund reinsurance placement and including only Southern California Edison and San Diego Gas & Electric.
A week later, the broker issued a more detailed placement submission and modelling information to reinsurers that had signed NDA’s, so that they could formulate quotes.
Alongside the Guy Carpenter brokers, the CEA’s risk transfer team came up with modelled ranges for pricing and capacity to meet the needs of the Fund’s “durability” (or financial strength).
At this time the lead reinsurance markets provided their quotes, but after analysing these the CEA’s risk transfer team decided that “the pricing and structure did not sufficiently meet the goal of enhancing the Fund’s durability.”
As a result the renewal was not placed and the Wildfire Fund remains without reinsurance at this time it seems.
Alongside the broker, the CEA’s risk transfer team continues to analyse the Wildfire Fund’s risk transfer needs to try and come up with an option that can be placed with reinsurers.
It’s likely this now also factors in the fact PG&E has joined the Fund as of this month and so the level of risk has risen and its needs for reinsurance with them.
It may prove more economical to purchase reinsurance for a larger risk pool, perhaps. Although it’s widely known that PG&E’s electrical infrastructure is generally considered older and more fire prone than the other utilities, so how it will affect pricing remains to be seen.
The CEA and its brokers intend to revisit the reinsurance market “if a program is developed that can achieve the durability goals of the Fund.”
With reinsurance rates hardening, the CEA noted that when engaging with the reinsurance market, “Comments from reinsurers did seem to suggest that the worldwide reinsurance market continues to be quite price-sensitive and is looking to see rate increases in general across most or all of its reinsurance portfolio.”
It’s not clear whether the capital markets was approached with any potential catastrophe bond terms, although at this time no mention of the capital markets has been made.
The cat bond market was receptive to a new California wildfire bond very recently, in the $90 million SD Re Ltd. (Series 2020-1) for Sempra Energy, but it’s possible the size of coverage the Wildfire Fund would need is above where cat bond investor and fund appetites sit for wildfire risk.
That said, the cat bond market could provide one source of capacity, in a program structure and at the right return-period capital markets coverage may prove price competitive with traditional reinsurance.
With the inclusion of the added risk of PG&E now in the California Wildfire Fund, the need to procure risk financing will be more urgent, you would think.
As a result, it seems likely the Fund and its current administrators the CEA and California Catastrophe Response Council will continue to engage with the reinsurance brokers and certain reinsurance markets over the coming weeks and months, in the hope of finding a more attractively priced solution for its renewal.