A Catastrophe Bond Design for the Financial Resilience of Electric Utilities Against Wildfires

Abstract

The scale of wildfires, in terms of acreage burned and mortality rates, is risingdue to climate change. There are various causes for wildfire ignition; however, power lines are one of the most significant factors, leading to some of the most devastating wildfire events over the past decade and even bankrupting electric utilities. Traditional insurance strategies are often not applicable for providing financial resilience to electric utilities against such catastrophic events. This paper quantifies the associated risk and proposes a catastrophe bond (CAT bond) as a form of parametric insurance to cover a portion of the risk. Vegetative fuel, weather, power grid, and historical wildfire ignition data are integrated into a proposed simulation-based methodology to accurately price the risk of the third-party wildfire liability, transmission line reconstruction, and the cost of load-shedding. The proposed methodology offers a useful tool for transmission system owners to transfer a portion of the risk of wildfire ignition to CAT bond investors. In addition, the premium calculation is analyzed through a sensitivity analysis to calibrate the indemnity-based CAT bond parameters.