INNOVATIVE RISK TRANSFER 

SOLUTIONS

Reducing disaster risks and building resilience for wildfires

Federal Advisory Committee on Insurance 

September 29, 2022 
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 2

Case Study: California Wildfire Fund

Issue: Wildfires have cause severe impacts in California over the past several years. Due to inverse 

condemnation laws in the state, the investor-owned utilities (IOUs) are held strictly liable. As claims 

skyrocketed, the IOUs found themselves unable to cover the costs leaving the state of California compensate 

victims.

First-hand knowledge: Marsh was the insurance brokerage for the largest utilities in the State and each was 

struggling with financial liquidity. 

Policy change: On July 12, 2019, Governor Gavin Newsom signed Assembly Bill 1054 creating a $21 billion

wildfire fund to pay claims on catastrophic losses should the IOUs became insolvent. 

Marsh McLennan solution set: Our reinsurance brokerage Guy Carpenter structured a reinsurance program

for the claims fund and our economic consulting firm, NERA, performed an economic analysis to determine 

appropriate surcharges and tariffs for ratepayers.
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 3

Quantifying Insurance Benefits of a Nature-based Approach 

to Reducing Risk: Wildfire Risk Reduction Buffers

The project: Together with The Nature Conservancy of California, we undertook a research project to quantify 

the benefits of a nature-based approach to reducing wildfire risk by using the town of Paradise, California as a 

case study.

Findings: We found that building codes, coupled with the use of wildfire-risk reduction buffers, can have 

measurable financial and wildfire risk reduction benefits for communities and minimize ecological impacts. 

Implications for Paradise: Natural buffers and strong building codes together would have reduced the 2018 

Camp Fire loss by 42%.

Broader implications: The research demonstrates the economic value of a community-level focus on 

catastrophe resilience and the potential for Community-Based Catastrophe Insurance (CBCI) to capture the 

financial benefits for residents through reduced insurance premiums and increased supply of risk capital.
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 4

0

50

100

150

200

250

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

# of Natural Catastrophe Events

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1970197219741976197819801982198419861988199019921994199619982000200220042006200820102012201420162018

USD Millions

Uninsured cat. losses 10 Year Mov. Avg.

Disasters are becoming more frequent and more costly

Natural catastrophe loss frequency is on the rise... ...along with the value of related uninsured losses
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 5

Too few have insurance

Often unaffordable 

Sometimes unavailable

Poor understanding of risk exposure

Limited understanding of disaster insurance

Biases in decision-making

These present economic and social challenges, 

but also opportunities for innovation

60

50

10

70

40

0

20

30

80

90

100

10%

14%

30%

Properties with 

flood insurance 

the in the US

Properties with for 

flood insurance 

inside the 100-year 

floodplain in the US

Properties with 

earthquake 

insurance in 

Missouri

Properties in 

California with 

earthquake 

insurance

5%

Why? We have a long way to go
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 6

Government

Uninsured liability overwhelms private sector capacity, while 

uninsured damage to public buildings and infrastructure stress 

reserves

Businesses

Businesses typically have better insurance coverage than 

individuals however certain areas are stretched (e.g., typically only 

30% of small businesses are insured)

Individuals

Individuals typically buy inadequate voluntary catastrophe insurance 

and when coverage is purchased, high deductibles and uncovered 

losses can still lead to financial distress

Economy

Large catastrophe events in areas of low insurance penetration can 

drive-up short-term expenses and decrease revenue, negatively 

impacting long-term growth Event

Economic Damage

Event Severity

Catastrophic events have widespread and lingering financial 

impacts on communities
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 7

Community Based 

Catastrophe Insurance (CBCI) 

is an innovative mechanism to 

increase insurance coverage 

and enhance resilience Insurance arranged 

by a local governmental 

or quasi-governmental 

body to cover a group 

of designated 

properties or 

individuals within 

the community’s 

jurisdiction. 
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 8

Illustration of Gap Formation

CBCI can support efforts to improve risk 

reduction and risk transfer

Economic Loss/

Liability

Risk Reduction (hazard 

mitigation, preparedness 

planning)

Risk Financing (risk transfer, 

savings mechanisms)

Protection

Gap

Risk reduction can strengthen 

risk transfer markets and risk 

pricing can incentivize risk 

reduction at community level

(Contingent) Liabilities arising from 

protection gaps drag on economic growth 

and govt. fiscal sustainability. Increasing 

insurance penetration and lowering risk in 

a community enhances fiscal risk profile

Channels for Communities to Close Protection gaps via CBCI

CBCI is a potential mechanism for communities to increase insurance coverage, incentivize risk 

reduction and enhance fiscal solvency
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 9

Potential Benefits of CBCI

Enhance Financial 

Resilience

Reduces the community’s 

contingent disaster liabilities 

Enhances the community’s credit 

risk profile

Speeds the insured individuals and 

businesses to recovery

Supports the community’s postdisaster economic revitalization

Provide Affordable and 

Available Coverage

Reduces premium costs by:

- Increasing buying power and 

securing volume discounts

- Enhancing data provision for risk 

analysis

- Reducing administrative costs 

- Supporting means testing

Increases insurance availability 

by:

- Potential for lower premium 

costs 

- Guaranteeing coverage postloss

- Increased confidence in risk 

assessment and peril 

modeling.

- Retaining and attracting 

catastrophe capacity.

Incentive for CommunityLevel and Individual Risk 

Reduction

Enables capture of premium 

discounts for community-scale and 

household mitigation efforts

Supports financing of risk reduction 

activity via premium surcharge

Enhances decision-making around 

risk reduction through risk analytics 

and pricing
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 10

Define

the need

• Determine which 

groups could benefit

• Consider motivations 

for CBCI

• Identify residents’ 

needs and key 

risk exposures

Engage 

stakeholders

• Engage 

community early

• Communicate and 

educate community 

about risk and 

mitigation options

Analyze

risk 

• Capture data and 

modeling to design 

appropriate risk 

transfer structures and 

risk reduction 

mechanisms

• Understand the risk

• Set premiums

Determine 

authority to act

• Consider what entities 

have an interest 

• Who has 

regulatory authority to 

implement

• Consider what policy 

reforms or institutional 

changes are necessary

01 02 03 04 05

Transfer

risk

• Consider 

capital providers

• Determine premium 

payment options 

• Map options 

for disbursing 

claims payment

Five-part Framework for Implementation
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 11

The Spectrum of CBCI Solutions

Facilitator Group Policy Aggregator Community Captive

Degree of community control, resources and expertise required increases with each model

Community Captive model

Community establishes its 

own risk-bearing entity 

(e.g., a captive) 

Aggregator model

Community buys bulk 

parametric catastrophe 

insurance 

Group Policy model

Community arranges a group 

policy on behalf of its members

Facilitator model

Community helps to establish a 

beneficial arrangement with an 

insurer for community members
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 12

Parametric Risk Transfer

Simplified (re)insurance structure where conditions for payment are 

defined pre-event occurrence & based on credible measurements or 

physical conditions Structured as/for insurance, 

reinsurance or retrocession; 

Insurance accounting 

treatment or derivative forms; 

Utilizes insurance, 

reinsurance &/or ILS (Cat 

Bond / Collateralized Re) 

capacity

• Event based product rather than an indemnification of an incurred 

loss (appreciation of basis risk)

• Pre-defined limits will pay-out based on pre-defined terms and 

event characteristics

• Pay-out terms are set and defined by specific trigger mechanisms

• Triggers are directly related to the peril/event the protection buyer 

wants to protect against, e.g.

o Earthquake: magnitude, latitude, longitude, depth

o Hurricane: Wind speed, track

o Wildfire: Coordinates / area of burn

• Contract only pays when defined trigger mechanisms are 

experienced and recorded
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 13

MODELING

GC FireCell can be modeled with 

a variety of cat modeling tools, 

which enables the client to 

understand the risk and 

uncertainty of the transaction. GC 

FireCell also uses all available 

historical information to validate 

the parametric solution outcomes.

COVER TYPE: Parametric wildfire

PERILS COVERED: Wildfire

COVERED LOSSES: Any loss including property & time element

CLAIM PERIOD: Pays within 30 -70 business days; one year for justification

LIMITS: Typically $5 - $25 million via (re)insurance, higher limits available, 

potentially including insurance-linked securities (ILS) 

MARKETS: Global reinsurance companies and capital markets funds

MECHANISM: High-res cat-on-a-grid index

GEOGRAPHIC AVAILABILITY: Global

REPORTING AGENCY: NASA Fire Information for Resource Management 

System (FIRMS)

REPORTING PARAMETERS: Geo-coordinates of the center of a pixel 

flagged as containing fire

CUSTOMIZATION: Any portfolio

US (Napa Valley)

NEAR-REAL-TIME MONITORING

GC FireCell uses NASA operated 

satellites to establish trigger conditions in 

near-real-time. If the detected fires 

overlap the exposure footprint, client 

obtains a proportional recovery.

EXPOSURES

Client exposures are disaggregated to a high resolution 

grid of 0.001deg x 0.001deg (~100m). Client can 

associate exposures with geographic zones in order to 

consider property or other (BI, CBI) exposures.

MODEL A MODEL B HISTORICAL

GC FIRECELLSM
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 14

Project goal: Increase the financial resilience of low- and moderate-income households in New York City to 

flood risk through the use of inclusive insurance. These communities are increasingly vulnerable and in many 

instances, under or uninsured.

• Inclusive insurance refers to any program or policy that makes insurance coverage available to those 

previously locked out of the insurance market. 

• Internationally, there has been a growing movement to identify low-cost insurance designs and establish 

public-private partnerships that can guarantee a more equitable recovery, however, these innovations have 

yet to be widely adopted in the US.

This project will establish NYC as one of the first local governments in the US to harness this approach.

CBCI Case Study: New York City

Inclusive Insurance: Promoting the Post-Flood Financial Resiliency of Low and Moderate Income 

Households
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 15

Disincentive 1: When evaluating requests for major disasters and making recommendations to the President, FEMA 

considers the amount of insurance coverage that is in force as a factor for a Presidential Disaster Declaration.

• Communities with high insurance rates will be less likely to receive a declaration.

Disincentive 2: If declared, FEMA will deduct the amount of insured losses from the eligible funding.

• Governments and individuals with insurance will not receive federal funding for their insured losses.

This disincentivizes governments and individuals from taking the proactive step of financially protecting themselves from 

disasters. 

• It could also create a moral hazard by discouraging governments and individuals from mitigating their risks because disaster 

losses are born by the taxpayer, not by them. (Insurance premiums reflect the actual risks and incentivize risk reduction 

measures.)

Challenge: FEMA program disincentives

The Stafford Act disincentivizes communities and individuals from purchasing insurance

Possible solutions: 

A. Remove insurance as a factor for disaster declarations and/or allow for reimbursement of insured losses.

B. Provide mitigation or preparedness grants in the amount of insurance premiums paid.

C. Allow for eligibility of insurance premiums for mitigation and preparedness grants.
© 2022 Marsh & McLennan Companies, Inc. All rights reserved. 16

Learn more

Access the Marsh McLennan & Wharton report on CBCI here: 

Please contact us if you wish to discuss further or have any questions: 

Daniel Kaniewski 

Managing Director, Marsh McLennan Advantage 

daniel.kaniewski@mmc.com

Christopher Sykes

Managing Director, Guy Carpenter 

christopher.skyes@guycarpenter.com

Jake Clark

Managing Director, Guy Carpenter

jonathan.clark@guycarp.com
We are leaders in risk, strategy and people. One company, with four global businesses, 

united by a shared purpose to make a difference in the moments that matter.