The California Earthquake Authority (CEA) is gaining an expanded remit, as it is set to take on administrative responsibility for California’s recently approved $21 billion wildfire insurance fund.
The $21 billion wildfire insurance fund is being set up to provide a source of capital that will cover some of the costs utilities operating in California may face due to payments to victims of wildfires that their own infrastructure has caused.
The wildfire fund regulation, which was passed by the state Governor a fortnight ago, is a clear response to the deadly and devastating impacts of wildfires in California over the last two seasons.
In particular, the 2018 wildfires destroyed more property and killed more people than any season before and equipment owned by the utility PG&E has been deemed to be the cause of the outbreak of the most impactful blaze of the year, the Camp wildfire.
The Camp wildfire is expected to drive the largest ever insurance and reinsurance market loss from a wildfire, at somewhere north of $12 billion, while the costs PG&E may face and which may be paid for in part by the taxpayer also extend well into the billions.
As a result, establishing the wildfire fund will provide some financial support for the utilities, helping the state to reduce the need for it to step in with payments to bail them out, so lowering the risk on taxpayers.
The fund won’t sell insurance and wildfire victims cannot claim from it, rather its a source of capacity to help the utilities who will pay into the fund to finance it, alongside a bond sale by the state that will capitalise 50% of the $21 billion.
The California Earthquake Authority (CEA) has been selected to provide the role of administrator of the Wildfire Fund until a permanent decision is made as to its running and operation.
Part of that remit may include buying insurance or reinsurance to support the fund in making any claims payments.
The CEA would be an ideal agent to secure a reinsurance or risk transfer program to protect the new California wildfire insurance fund, given its experience buying reinsurance and risk transfer for the state’s earthquake insurance exposure.
The CEA currently buys around $8.3 billion of protection from reinsurance and catastrophe bonds, while it expects to be buying as much as $10.6 billion of coverage by the end of 2023.
Adding in a purchase of reinsurance, or perhaps even capital markets backed risk transfer for wildfire property risks, would be an interesting prospect, especially if the state of California took the opportunity to explore how diversification could benefit it, in terms of risk transfer costs.
The role of wildfire fund administrator includes the remit to, “Buy insurance or take other actions to maximize the claims paying resources of the fund,” according to the recently passed legislation.
The administrator can also review and make a recommendation as to the appropriate amount of insurance coverage required by an electrical utility, the law states.
The ultimate goal of the wildfire fund legislation is to allow, “electrical corporations that are safe actors to guard against impairment of their ability to provide safe and reliable service because of the financial effects of wildfires in their service territories using mechanisms that are more cost effective than traditional insurance, to the direct benefit of ratepayers and prudent electrical corporations,” the bill continues.
“Mechanisms more effective than traditional insurance” here refers to the fund itself, but that’s not to say that alternative risk transfer techniques wouldn’t make an effective way to cover the fund itself from peak wildfire events.
Having a layer of reinsurance or risk transfer, provided by traditional means or instruments such as catastrophe bonds that tap the capital markets, could provide a buffer for the wildfire fund when the worst disasters strike, ensuring there is capital available even when the fund looks set to be exhausted.
The wildfire fund is designed to help utilities pay the claims and damages of wildfire victims, where there equipment is deemed at fault in causing a blaze.
But it could also act as a risk pool, enabling electrical utilities exposure to wildfires in California to be bundled and backed more effectively by insurance, reinsurance or capital markets risk transfer tools.
It’s early days still, as the CEA is only set to begin to put in place the processes to administer the fund at a Board meeting tomorrow.
There’s no guarantee risk transfer will be bought for the wildfire fund, or that the CEA will remain administrator for very long, at this stage. But the CEA’s involvement will provide robust grounding for the initiative and expertise on the benefits of accessing capital to transfer some of the pooled wildfire risks.
Hence, the subject of risk transfer for the wildfire fund is almost certain to arise, which could mean discussions with the reinsurance and insurance-linked securities (ILS) market, led by the California Earthquake Authority (CEA), in the future. A development to watch.