CEA’s Wildfire Fund role includes reinsurance & risk transfer set-up

The California Earthquake Authority (CEA) will look to set up a reinsurance and risk transfer program for California’s recently approved $21 billion wildfire insurance fund, we can now confirm.

As we reported earlier this month, the California Earthquake Authority (CEA) is gaining an expanded remit, as it is set to take on administrative responsibility for the newly enacted and in process of being launched Wildfire Fund for the state of California.

We explained that the $21 billion wildfire insurance fund will provide capital to cover some costs utilities operating in California may face due to payments to victims after wildfires that their own infrastructure causes.

With the CEA selected to take on the role of administrator of the Wildfire Fund, until a permanent decision is made as to its running and operation, we explained in our recent article that there is a good chance that reinsurance and risk transfer arrangements may have featured as part of its remit.

We can now confirm that to be the case.

The CEA’s Governing Board is now set to decide on a number of reinsurance and risk transfer related items at its next meeting.

The Governing Board will discuss activities required to procure reinsurance and risk transfer services for the California Wildfire Fund. This will likely involved approving a beauty parade of brokers, advisories and perhaps risk modelling firms, to help in analysing the risk and identifying the best risk transfer or reinsurance solutions, if indeed any are required.

The Board will also be asked to consider adopting a resolution to approve CEA staff to go out and contract for the reinsurance and risk transfer advisory services required, to develop risk transfer guidelines and a risk transfer strategy specifically for the Wildfire Fund.

All of the above is already in place for the CEA’s earthquake reinsurance and risk transfer needs and the Authority is able to make reinsurance purchasing decisions without onerous oversight each time it renews or places a new risk transfer contract.

It’s likely the CEA staff will seek similar approval, to go to market when required and gain quotes for fresh reinsurance and risk transfer, utilising whatever sources of capital are most appropriate and efficient at the time.

That would likely include some investigation of the insurance-linked securities (ILS) market and its appetite for California wildfire risk, as a potential avenue could be to issue wildfire linked catastrophe bonds or wildfire ILS to back the Wildfire Fund’s protection needs.

It’s encouraging to learn that risk transfer is definitely on the agenda for the new Wildfire Fund, as these risks should be transferred and moved away from public and taxpayer balance sheets.

The reinsurance and ILS market will be able to absorb what wildfire risk cannot be retained and while pricing won’t be keen, after the significant wildfire losses seen in recent years, it’s still likely to be competitive with other forms of risk financing that the CEA could investigate and of course shifts the risk completely out of the new Fund which has got to be preferable to retaining exposure to it.

Also read: CEA takes on Wildfire Fund admin. Remit could see re/insurance bought.