PG&E walks away from market with ‘limited capacity’ bound

PG&E has walked away from the (re)insurance market with only limited cover in place from August onwards after it secured limited market support despite proffered rates-on-line in the 40s after two full-limit losses in two years, The Insurance Insider can reveal.

The revelation comes as sister title Trading Risk revealed that the California Wildfire Fund is seeking to buy a $2bn reinsurance programme to provide excess cover for CalEdison and Sempra only.

The troubled utility is in bankruptcy proceedings after incurring insurmountable losses relating to the two most severe Californian wildfires in the state’s history.

This publication understands that PG&E’s broker, Guy Carpenter, informed markets in recent weeks that PG&E had reviewed all the offers and terms presented to it and found “very few” had satisfied the requirements of its senior management.

As a result, only “limited capacity” was bound for the company, which would usually have renewed its annual cover from 1 August.

PG&E told carriers it would continue to hold discussions with potential risk transfer partners and expected to return later in the year to purchase cover.

The utility added that, by that time, it "hope[s]" to have "an exceptionally benign wildfire season behind [it]", as well as more clarity around its liabilities and the outcome of various legal actions taken against it.

PG&E's inability to secure meaningful amounts of cover from the commercial market reflects a highly distressed market for wildfire utility risk driven by loss experience, scepticism of the modelling and the exclusion of this risk from retro protection.

With the risk attached to these liability programmes dominated by wildfire risk, over the past two years the business has migrated towards being written in the cat reinsurance market.

CalEdison and Sempra, PG&E's peers, are both believed to have secured their programmes but sources said these deals were being offered with huge increases, with the former believed to have a rate-on-line in the 30s.

In May, the California Department of Forestry and Fire Protection (CalFire) ruled PG&E responsible for the devastating Camp Fire that struck Butte County in November 2018, causing $12bn in insured losses.

A jury is set to decide whether PG&E is also responsible for $18bn in legal claims related to the 2017 Tubbs fire, despite CalFire clearing the utility of responsibility for the blaze.

PG&E’s liabilities for the fires – the two most destructive in Californian history – are likely to total as much as $30bn.

The utility filed for bankruptcy in January, after Allstate, State Farm, USAA and other insurers sued it over losses resulting from the Camp Fire.

Californian utilities firms have faced challenges in recent years in the face of mounting claims for wildfire liability.

In July, lawmakers in the state passed a bill to create the California Wildfire Fund, administered by the California Earthquake Authority. The $21bn fund is to help state-owned utilities to cover the cost of damage from future wildfires.

Guy Carpenter was appointed to secure risk transfer and reinsurance for the fund, which sources said the assureds wanted in place by mid-September.

As revealed by sister title Trading Risk, the cover being marketed has $2bn of limit and sits excess of underlying protections purchased by CalEdison and Sempra, with PG&E no longer included in the plan.

Market sources are sceptical (re)insurers wary of wildfire risk will make meaningful capacity available at the low rates-on-line under discussion.

A spokesperson for PG&E said: “The safety of our customers and the communities we serve is PG&E’s most important responsibility.

“Our efforts to reduce the risk of wildfires remain ongoing as we also focus on the other risks we need to actively manage.

“PG&E will continue to work with current and prospective insurers to find solutions that work for both parties and will likely be back in the market sometime in the latter part of the year.”