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Climate risks spur government searches for private-sector solutions

Posted On: Feb. 26, 2019 7:10 AM CST

climate risks

California’s recent proposal to transfer the risk of rising wildfire costs and potentially other disasters to the private insurance, reinsurance or capital markets is part of a growing trend of state, regional and federal governments looking for ways to mitigate the financial impact of catastrophic climate risks, observers say.

S.B. 290, or the California disaster insurance bill, would allow the state to dip into existing emergency funds to pay a premium that would trigger “payment to the state in the event of a disaster,” according to the state insurance department’s Feb. 14 statement.

The bill, which could be in place by January 2020, was introduced by state Sen. Bill Dodd, D-Napa, along with California Insurance Commissioner Ricardo Lara and Treasurer Fiona Ma.

The costs of fighting wildfires have overrun the emergency budget of state firefighting agency Cal Fire in seven of the last 10 years, said Michael Soller, deputy commissioner for communications and press relations for Northern California in Sacramento.

California spent $947 million in 2017 to 2018 through the emergency fund for firefighting, over $450 million more than was budgeted, according to Cal Fire.

“California is really grappling with the impact of these wildfires. While the bill addresses disasters more broadly, our top priority here is stabilizing our wildfire emergency costs,” Mr. Soller said.

“But we want to take the opportunity to look at all the disaster risks the state faces, so the bill gives broad authority to the governor, the insurance commissioner and the treasurer to explore whether they do enter into a risk transfer solution,” he said.

For the state of Oregon, the state purchases insurance to protect the state against ever-changing wildfire costs. The Oregon Department of Forestry has purchased a catastrophic wildfire insurance policy to cover part of the state’s costs for fighting large wildfires since 1973, according to Marie Hansen-Wargnier, risk consultant for the state of Oregon’s department of administrative services, risk management division.

While the state self-insures risks that are more frequent and predictable, it also buys commercial insurance coverage for risks that are “unique or special or where we want to reduce or transfer our own risk,” said Ms. Hansen-Wargnier.

The state’s catastrophic wildfire insurance policy, underwritten by Lloyd’s of London underwriters, provides $25 million in coverage for firefighting costs on wildlands protected by the Oregon Department of Forestry, excess of a $50 million deductible, according to information posted on the state’s department of risk management website.

From 1973 to 2015, the state spent $61 million on premiums and received $102 million in insurance payments, according to the Oregon Department of Forestry.

“When we renew our policies every year, we are very thoughtful about the cost-benefit ratio of what those policies bring and the peace of mind and financial benefit that they bring to the state of Oregon,” said Ms. Hansen-Wargnier.

Oregon has also looked at the alternative markets for parametric or catastrophe bond cover, but found the cost of those alternatives to be “significantly” more expensive than traditional insurance, she said.

In California’s case, the purchase of disaster insurance would be a way to smooth financial volatility and to “transfer some of our risks to our budget and taxpayers to private markets,” said Mr. Soller.

He cited the Federal Emergency Management Agency’s purchase of reinsurance from the private market as the best example of this type of disaster response model in action.

“FEMA has been buying reinsurance to cover its disaster response to storms since 2017. That policy was triggered after Hurricane Harvey and it worked, paying out a little over $1 billion to cover a portion of the National Flood Insurance Program losses above $4 billion,” he said.

On a regional level, the Cayman Islands-based CCRIF SPC, formerly the Caribbean Catastrophe Risk Insurance Facility SPC, is a risk pool that has been helping Caribbean governments since 2007 to mitigate the financial impact of major disasters.

Nineteen Caribbean governments and two central American governments are currently members of CCRIF, which provides parametric coverage to its members, said David Simmons, London-based managing director of the capital, science and policy practice for Willis Towers Watson PLC, the multicountry risk pool’s reinsurance broker.

CCRIF’s proof-of-concept year was 2017 when “we had Hurricane Irma and Maria hitting multiple islands across the Caribbean and CCRIF was able to pay every country which triggered within 14 days of the storm hitting the island,” said Mr. Simmons.

Since 2007, CCRIF has made 45 total payouts to member governments on their tropical cyclone, earthquake and excess rainfall policies, totaling almost $139 million, he said. “It provides quick immediate liquidity after an event,” he said.

CCRIF also buys some $150 million in reinsurance from the private market for its tropical cyclone and earthquake exposures and did not make a claim on that reinsurance until 2017, Mr. Simmons said.

“Reinsurers have been quite fortunate, but at the same time CCRIF has had the benefit of reinsurance being there, which gives its policyholders, which are national governments, the certainty that the payment will be made,” he said.

CCRIF remains a “poster child” for how insurance can work for humanitarian aims, Mr. Simmons said. “Insurance isn’t just about property or about the middle class, it can be about helping countries get back on their feet after a disaster.”