Is California's Wildfire Bond A Missed Opportunity?

California’s insurer-of-last-resort has just pulled off a Wall Street first.

In December, the state’s FAIR Plan Association locked in US$750mn of reinsurance protection through a catastrophe bond, the largest ever sold that is exposed purely to wildfire risk. The FAIR plan says the deal will help pay out future disaster claims and lower the likelihood it needs to call on private insurers to help cover its obligations.

It also underlines the growing popularity of catastrophe (or ‘cat’) bonds as a way to package and shift climate risks around the financial system, enhancing the financial resilience of insurers in the bargain. This is borne out by the bond’s pricing. Money managers clamored for a piece of the action, pricing the bond at the bottom of its final guidance. Holders will be paid a 9.75% spread, roughly 11% lower than the midpoint of initial pricing. That tightening came even after California’s worst-ever wildfire disasters — the Eaton and Palisades fires in Los Angeles.

But to some, the bond represents at best a missed opportunity for the FAIR Plan to become a pioneer in resilience financing, and at worst a costly boondoggle that does little to support hard-hit policyholders.

“The question — and I don’t know the answer to this – is whether this is the best way to fill a gap that needs to be filled to protect policyholders, or is it just a way for insurers who control the FAIR plan to protect themselves from an unlikely assessment … by foisting extra premium on to policyholders?” asks Douglas Heller, Director of Insurance at the Consumer Federation of America.