“Measured appetite” in ILS for wildfire risks: Guy Carpenter’s Hochberg

In time, as wildfire risk models advance and the market becomes more accepting of them, Guy Carpenter executives suggest investor confidence may increase, resulting in a growing willingness to deploy ILS capital to support the California market’s need for wildfire protection.

Recently reinsurance broker Guy Carpenter held its California Summit event and senior executives from the company commented on the state of the reinsurance marketplace and its appetite for perils in the state.

David Priebe, Chairman of Guy Carpenter said, “It’s a dynamic and challenging time for the California property market. Guy Carpenter is excited to be leading the conversation with insurance carriers, capital providers and regulators to foster collaboration between parties, as we all work toward the goal of bringing sustainable capacity to residents and businesses in California while allowing capital providers to earn a fair return.”

Kelli Cronin, Managing Director, Treaty Broking, North America at the broker added, “Industry collaboration and knowledge sharing is critical to evolving our understanding of wildfire risk and increasing investor appetite for the peril.”

Cronin further explained that appetites are increasing, which could be a good sign for California, “Throughout the mid-year renewals, we saw an increase in reinsurer appetite, improved buying conditions and adequate capacity to meet increased demand.”

Ed Hochberg, Head of Global Risk Solutions at Guy Carpenter then highlighted capital market appetites for California wildfire, an area that has been suppressed in recent years after heavy losses from damaging wildfire seasons that occurred while the reinsurance market was still softened.

“Historically, the ILS market has been dominated by critical US catastrophe perils (US wind and US quake); however, we believe that there is measured investor appetite in the ILS space for perils such as wildfire,” Hochberg said.

But he added that, “It will take some additional maturity and consensus around the modeling for the peril in order to increase investor confidence and to create a more liquid market in wildfire-exposed transactions.”

On that front, James Mitchell, Consultant at the reinsurance broker explained, “It is essential that the industry collaborates to build sustainable risk solutions for complex perils such as wildfire. Leveraging recent and significant technical innovation, serves to deepen our ability to evaluate the risk and attract consistent partnership capital.”

Kimberly Roberts, Head of North America Peril Advisory pointed out that the peril itself is becoming more volatile.

Roberts said, “The complicated interplay between humans and natural environment is undoubtedly contributing to escalating wildfire risk, which is also occurring on the backdrop of a warming climate.”

Colleague Mark Hope, Senior Vice President of North America Peril Advisory added, “A peril as complex as wildfire requires multiple perspectives provided from multiple data sources and tools in order to build confidence and clarity in our understanding of risk.”

Finally, the role of parametric risk transfer was highlighted as an opportunity for channelling more capital to underpin California wildfire risks.

Guillermo Franco, Managing Director, Global Head of Catastrophe Risk Research at Guy Carpenter said that, “Parametric solutions continue to grow and evolve, complementing and enhancing indemnity coverages, and providing fast and versatile payouts after wildfire events.”

Appetites for assuming wildfire risk remain measured in insurance-linked securities (ILS) markets, but advances in models, data and tech can and will help.

This is a peril that challenges the traditional insurance and reinsurance market still and the need for risk capital to support a greater ability of those companies to service clients is clear, so we expect over time a growing amount of capital markets capacity will support wildfire risk underwriters.

We don’t expect any rush of capital to this peril, the appetite of ILS investors is likely to remain measured. But we do concur with Guy Carpenter, that it will likely grow over time, even if slowly to begin. While advances in how risk is viewed, analysed and priced could support that capital flowing to wildfire risk increasing faster over time.