Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

PG&E’s wildfire subrogation settlement may benefit some ILS funds


The recent announcement from Pacific Gas and Electricity (PG&E) of an insurance subrogation settlement totalling $11 billion may eventually provide some benefit to ILS funds that were exposed to losses from certain 2017 and 2018 California wildfire events.

Wildfire industry lossesPG&E’s equipment and infrastructure has been deemed liable for a number of the major wildfire outbreaks in California over the last two years, most notably for the devastating Camp wildfire.

Between the wildfires over the last two years, the insurance and reinsurance industry, including collateralised reinsurers, retrocessionaires, ILS funds and catastrophe bond investors, have been on the hook for almost $30 billion of losses.

The announcement from PG&E stated that it will “resolve all insurance subrogation claims arising from the 2017 Northern California wildfires and 2018 Camp Fire.”

Those wildfires cost insurance and reinsurance interests, including ILS funds and investors, somewhere around $20 billion, based on the latest industry loss estimates for 2017’s Atlas, Thomas and Tubbs wildfires and 2018’s Camp wildfire.

The agreement is with entities that represent roughly 85% of insurance subrogation claims from these wildfires, which will include insurers that bore the exposure, as well perhaps as some reinsurers and also hedge fund investors that had acquired some subrogation rights in the interim.

The announcement formalised an $11 billion agreement reached with those parties and the claims are based on payments made by insurers to help those impacted by the wildfires.

The agreement means some benefits will flow back to the insurance and reinsurance sector, in terms of recouping some losses paid, as subrogation is considered a favourable outcome for re/insurers and so potentially for some reinsurance and ILS transactions related to them.

As a result it is considered a favourable decision for some ILS funds and their investors, particularly those entering into quota share and other risk sharing insurance-linked securities (ILS) arrangements.

There is also the potential for this to benefit reinsurance sidecars as well, given their largely quota share nature.

It’s also interesting to consider whether any of the subrogation settlement could ever fall to the benefit of any retrocessionaires as well, a significant amount of which would be collateralised.

Currently ILS fund managers are being very cautious about the potential for the PG&E wildfire insurance subrogation settlement to benefit them, with no one we’ve spoken with having factored any potential benefits into valuations as yet.

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