29 May 2019ILS

California bill to allow purchase of ILS products passes Senate

Legislation that would allow the State of California to purchase re/insurance and insurance-linked securities from the private market to cover the increasing costs of wildfires has passed the California State Senate.

Senate Bill 290 would allow the Governor to purchase insurance, reinsurance, ILS or other related alternative risk transfer products for the State of California to help mitigate against costs incurred by the state in response to natural disasters such as earthquakes, wildfire or flood.

The wildfire seasons of 2017 and 2018 have been record-breaking.  Insurance losses of $614 million from the Camp Fire, and the Woolsey and Hill Fires, have pushed total claims over $12 billion as of April 2019, according to the California insurance commissioner Ricardo Lara.

“As climate change continues to contribute to devastating infernos, we need a strategy to reduce the pressure on our state budget,” said Senator Bill Dodd, who introduced the bill along with Lara and treasurer Fiona Ma.

Dodd continued: “This bill would do just that, allowing the state to invest in an insurance policy to ensure budget predictability and reduce taxpayers’ exposure to increasing costs associated with disasters, especially wildfires. That savings and predictability would allow us to allocate more resources to wildfire prevention and mitigation efforts.”

SB 290 creates California Disaster Insurance, which would function like home insurance, but for the state, with premiums paid by a portion of existing emergency funds. The policy would trigger a payment to the state in the event of a disaster.

Where the State of California may seek to purchase re/insurance or ILS products, or whether this may create new opportunities within the Bermuda market remains to be seen.

The federal government, the World Bank, and the State of Oregon have all used insurance to reduce the risk to taxpayers following disasters.

Ma commented: "Today’s action brings us one step closer to giving the governor, myself, and the insurance commissioner the ability to purchase insurance, reinsurance, insurance-linked securities, and other alternative risk transfer products to help pay costs resulting from natural disasters. It makes good financial sense to do this."

Lara added: "Right now taxpayers are on the hook when the costs of fighting extreme wildfires go over budget, as they have in eight of the last ten years. Having insurance for our state budget against unexpected disaster costs can reduce the likelihood that California will have to trade off on other priorities, take on debt, or draw from rainy day funds in the future."