California legislation to issue bonds supporting the state's home insurer of last resort, might not be enough to keep the plan afloat in future disasters or if investors' appetites change, according to Jordan Haedtler, a climate finance strategist.
The bill "potentially has some downsides that aren't being properly comprehended by the policymakers who are pursuing it," said Haedtler, a policy advisor at the Infrastructure Fairness Project, who has also consulted with Climate Cabinet.
"Naturally, they have to get more premiums in the door before more losses go out," he said. "Otherwise, they're assessing the carriers to pay the cost of this financing."
Under the legislation, the FAIR Plan would borrow to cover its future costs by asking the California Infrastructure and Economic Development Bank to issue bonds on its behalf, which the FAIR Plan suggests could include catastrophe bonds.
If the FAIR Plan depleted any new funds that it gets through AB 226 provisions for traditional financing, due to another disaster like the January wildfires, it would need to seek funds again. As Halsband pointed out, "If the FAIR Plan uses all the money, they borrowed the money. They have to find a way to raise new money to repay it." In contrast, a catastrophe bond, like reinsurance, is principal-at-risk funding and need not be repaid to the lender, Halsband explained.
Providing the FAIR Plan with alternatives to future assessments is a good idea, Haedtler acknowledged, but "there is greater risk that those assessments will be occurring more frequently in the future," he said.
The American Property Casualty Insurance Association (APCIA) has
"My major concern with state governmental entities taking steps to foster greater cat bond investments is that cat bonds may not be poised to continue producing high returns going forward," Haedtler said. "Investor appetite for cat bonds, which is quite strong at the moment, may not remain strong forever."
The California Infrastructure and Economic Development Bank backing the bonds would see a better return if catastrophe thresholds are not triggered, Haedtler explained. The bonds potentially would "shield" policyholders from paying assessments after large losses like the L.A. wildfires.
Bonds supporting the FAIR Plan give it a financial buffer, according to state insurance commissioner Ricardo Lara, who supports AB 226. "This important bill," he stated in a press release, "allows the FAIR Plan to seek a line of credit in case it is needed – with solid financial footing reducing the impact of another major disaster on all Californians."
The L.A. wildfires led to the FAIR Plan assessing member insurers for $1 billion, the first assessment in 30 years, according to a
"AB 226 stabilizes the FAIR Plan by allowing bonds to spread costs over time, preventing sudden insurer assessments that could spike premiums or bankrupt small companies," Calderon stated.
