The California Wildfire Fund is set to return to the reinsurance market shortly to renew and expand the reinsurance program it secured after launching last year.
The Fund was set up in Q3 2019 as a source of capital to cover claims arising from wildfire events caused by any of the participating utility companies.
Currently only two utilities have joined – Diego Gas & Electric (SDG&E) and SoCal Edison – but PG&E is also likely to join once its bankruptcy reorganisation is completed, possibly in June.
Details of the original reinsurance purchase were not disclosed, but it is thought that coverage was in the hundreds of millions of dollars and well short of the $2 billion that the Fund had been seeking.
This shortfall was partly due to a lack of confidence in the wildfire risk models, which had not yet factored in the latest major wildfire events from 2018.
Additionally, utility companies (PG&E in particular) had been found responsible for the worst fires and owed subrogation claims, while the retrocession market had introduced much stricter exclusions and capacity limitations for the peril.
But the California Wildfire Fund is mandated to purchase reinsurance for the risks of the utilities it covers, so it is anticipated that Fund administrator the California Earthquake Authority (CEA) will soon be renewing coverage.
With PG&E still to join, this could mean that the Fund buys some reinsurance now, in time for the end of May expiry of its initial program, but then returns to the market to top up later in the year.
An increase in the size of the program is also expected, as a key focus of the renewal will be improving the durability of the Fund and its claims paying capacity.
Pricing and terms will be a key factor here, especially with reinsurance rate expectations on the rise generally across the marketplace at this time.
That said, appetite in the reinsurance market is likely to depend on confidence in updates to the wildfire models, as well as in the infrastructure and mitigation strategies of the utility companies.
The CEA will begin the procurement process in May 2020 with help from broker Guy Carpenter, and will probably decide on the structure of the renewal program by late May or early June.
