EXCLUSIVE: Reinsurance broker Guy Carpenter spoke with GR on negotiating the reinsurance placement for the newly formed CEA California Wildfire Fund
Guy Carpenter is targeting $2bn in reinsurance coverage for the new California Wildfire Fund “at appropriate pricing”, with inception aimed at 10 September 2019. Renewal and additional placements are expected at 31 May 2020, the reinsurance broker told GR.
The broker said it would be looking for long-term supporters of the fund, but that this could include working with insurance-linked securities (ILS) as well as conventional cover.
“We anticipate traditional reinsurance to be the main supplier; however, we would welcome ILS support as well,” Andrew Bossom, managing director and head of office at Guy Carpenter, told GR.
In August Guy Carpenter announced that it had been chosen to provide the strategic reinsurance and advisory services to develop a risk transfer and reinsurance strategy for the new fund.
“Our relationship with the California Earthquake Authority (CEA), the administrator of the fund, and the level of service we provide to CEA, strategically positioned us to offer the fund our leadership, dedication and expertise in the utility wildfire space,” said Bossom.
The new wildfire fund is a response to the Golden State’s dangerous wildfire peril, after 2018’s Camp Fire went down as the most destructive wildfire in the US state’s history.
“It’s not only about the Camp Fire; the 2017 and 2018 wildfires were devastating to California,” said Robert Reader, managing director, Guy Carpenter. “Although various solutions had been considered for a few years, the recent occurrences created the additional momentum and speed necessary for a legislative solution.”
This year California enacted its 2019 Wildfire Safety and Accountability legislation, which included a broad set of forms and programmes related to utility-caused wildfires.
As a part of the US state’s new legislation, the California Wildfire Fund was established, with CEA being assigned as the interim administrator tasked with getting the fund operational, under the direction of CEA’s governing board.
“Now, California has a comprehensive solution in place that shares the cost among many groups and is partially backed by the reinsurance community to help provide long-term stability of the wildfire fund,” said Reader.
In January this year power provider Pacific Gas and Electric (PG&E) filed for bankruptcy protection, facing tens of billions of dollars in liabilities following the role its equipment played in 2018’s wildfires.
Property reinsurance still constitutes the greatest share of wildfire losses. Guy Carpenter emphasised that claims resulting from property and liability losses are both of interest.
“Property losses are more easily negotiated and settled. Liability losses, such as bodily injury and loss of life, are more sensitive and require greater care to reach ultimate settlement,” said Nick Sacco, senior vice president, Guy Carpenter.
“The 2017 and 2018 wildfires highlighted the need for both types of protection, because we cannot forecast the next catastrophic wildfire and the type of damage it will do. PG&E’s bankruptcy simply highlighted the potential damage from the wildfire peril and the need for a broader California solution,” said Sacco.
“More than anything else, PG&E’s bankruptcy following the 2018 wildfires shifted the focus to preventing the wildfires in the first place. The commitments to strengthen the utility infrastructure and the ability to shut off power during high wind events – and the increased political acceptance to do so – is a paradigm shift in how we as Californians plan to deal with this risk in the future,” Sacco continued.
Since 2017 Guy Carpenter has been the reinsurance broker for the US National Flood Insurance Program (NFIP). Since then the broker has assisted NFIP in structuring $4.32bn of risk capital, including the first issuance of a catastrophe bond by a US federal government agency, via GC Securities.
“Globally, Guy Carpenter manages a number of reinsurance placements for public sector funds,” Bossom said. “Our global experience providing reinsurance solutions, paired with our long-term experience in working with utility insurers and directly with Fortune 1000 utilities for the past 10 years or more, makes Guy Carpenter a great fit for the needs of the California Wildfire Fund.”
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