Shortly after the start of the Los Angeles wildfires, on January 9, California state assembly members Lisa Calderon and David Alvarez introduced a
The bill is due to be heard in committee February 9, but debate has already begun on whether catastrophe bonds are enough to solve the state's property insurance problems.
"There are mixed views. You won't hear uniformly from progressives or insurance regulatory experts that cat bonds are a false solution," said Jordan Haedtler, climate finance strategist with Climate Cabinet, an education, advocacy and lobbying group. "There are some people who think that we should have more liquidity, and cat bonds are a way to achieve that. There's been major trends of cat bonds paying high returns, which is why they've grown as a segment of investment for hedge funds in particular."
The American Property Casualty Insurance Association (APCIA) supports issuing cat bonds for the FAIR plan, as its president and CEO, David A. Sampson, stated in a press release. "Insurers are committed to helping Californians recover and rebuild from the devastating wildfires. As part of this recovery, it is essential that the state legislature issue catastrophe bonds to recapitalize and restabilize the California FAIR Plan, which provides a critical safety net for homeowners," he said. "The
By selling cat bonds to fund the FAIR plan, the burden would not fall directly on California taxpayers, policyholders having to pay higher rates or insurers paying assessments. Bond investors would be funding the initiative. The Assembly bill would have the California Infrastructure and Development bank issue the bonds to cover the costs of claims and "increase liquidity and claims-paying capacity."
Still, this would be a larger public responsibility for financial protection of homeowners through insurance, as Katherine Hempstead, a senior policy advisor at the Robert Wood Johnson Foundation and author of "Uncovered: The Story of Insurance in America," explained.
"The fact that everything in P&C is very state-based becomes a little bit of an issue, because you don't have the ability to pool risk nationally," she said. To pool risk nationally, regulators would first have to get national-level data, which has been difficult because insurance is largely regulated by the states, Hempstead added.
The National Association of Insurance Commissioners (NAIC), the association of state insurance regulators, has not yet issued a report on
"There's a lot of partisan politics around the Federal Insurance Office, and if you suggest having national catastrophe reinsurance, there's a lot of opposition to that," Hempstead said.
