By Michael Loney

Jan 9 - (The Insurer) - Analysts at rating agencies and investment banks as well as other industry sources suggest the Los Angeles wildfires will rank among the most destructive in California’s history – and will possibly be the largest ever insured loss from the peril, with JP Morgan doubling its estimate to $20bn.

But recent market shifts including widespread retrenchment and appetite changes pose uncertainties over the share of loss among standard homeowners and commercial insurers, E&S carriers, the state’s FAIR Plan and reinsurers.

And multiple market sources have highlighted that the ultimate quantum of loss and its distribution are very uncertain at this point, with the speed of containment as well as potential for further spread in the coming days to areas with a different split between personal lines and commercial exposures critical in determining the outcome.

The consensus so far, however, is of a loss that already looks set to be the biggest ever from a California wildfire, which will further challenge the availability of coverage for the peril in the Golden State and potentially drive wider market impacts in property cat.

Morningstar DBRS commented that the wildfires currently burning in the Pacific Palisades, Eaton, Hurst and other Los Angeles neighbourhoods will cause “significant” losses for the insurance industry.

It noted that the fires have already burned more than 1,100 homes and threaten more than 28,000 additional structures, according to local fire officials.

“Preliminary estimates point to total insured losses in excess of $8bn depending on the final number of properties being affected by the wildfires,” it said.

The rating agency highlighted that in comparison the 2018 Woolsey Fire, which destroyed 1,643 structures just north of Los Angeles, caused more than $6bn in property damages at that time.

“Morningstar DBRS expects the ongoing wildfires to have a negative but manageable impact on major property insurers active in the Californian market, with the impact somewhat mitigated by their use of reinsurance and their high degree of diversification.

“Similarly, losses should be manageable for the global reinsurance industry and not affect their credit profiles,” it said.

The ongoing wildfires are very likely to be the largest ever such insured loss in the affected region. They could also rank as the largest ever insured loss from wildfires in the whole of California, depending on the ultimate size of payouts.

According to figures released by Aon last year, the largest ever insured wildfire insured loss was caused by 2018’s Camp Fire, at $12.2bn in 2023 dollars, followed by 2017’s Tubbs Fire, at $10.9bn.

JP Morgan doubles estimate to $20bn

As previously reported, equity analysts at JP Morgan on Wednesday issued a preliminary insured loss estimate of up to $10bn for the wildfires.

The JP Morgan analysts said that primary carriers would likely take the biggest hit from the event, notably homeowners carriers such as Allstate, Travelers and Chubb, while commercial portfolios at Travelers, AIG, Chubb and Kinsale Capital would also be impacted, with Arch Capital and RenaissanceRe the most exposed reinsurers.

JP Morgan has since updated its view to suggest that insured losses from the event will be even higher than previously expected.

“Expectations of economic losses stemming from the fires have more than doubled since yesterday to closer to $50bn, and we estimate that insured losses from the event could exceed $20bn (and even more if the fires are not controlled),” the analysts said in a research note on Thursday.

Jasper Cooper, vice president, senior credit officer at Moody’s Ratings, commented that the wildfires have caused widespread destruction of property.

“We would expect insured losses to run in the billions of dollars given the high value of homes and businesses in the impacted areas,” he said. “Losses will be shared among standard homeowners insurers, insurers specialising in high-value E&S homeowners policies, and the California FAIR Plan. In addition, commercial property losses could be significant.”

The Insurer reported on Wednesday that the California FAIR Plan has around $6bn of residential and commercial property exposure situated within the Pacific Palisades neighbourhood.

Carriers have reassessed California product offerings

Morningstar DBRS noted that leading US property insurers are in good financial condition, but that the California property insurance market has been challenging because of high wildfire and other natural catastrophe risks combined with regulatory restrictions on coverage and pricing.

This has led many insurers to re-think their product offering, including exiting the market.

Market leaders such as State Farm and Allstate started reducing their exposure to the California market beginning in 2022 and into 2023.

“It is therefore possible that a larger than usual portion of the losses caused by the wildfires will be uninsured or may be covered under the California FAIR Plan, which is designed to provide fire coverage up to $3mn per home and spread the risk across the industry when it is not available from traditional carriers,” Morningstar DBRS said.

The rating agency continued that the event reinforces the need for adequate rate increases on home insurance in California, based on forward-looking pricing and catastrophe modelling, as well as for additional fire prevention and mitigation initiatives.

“However, property insurance affordability is likely to remain a challenge in the state going forward, with many property owners opting to remain uninsured or under-insured because of the high costs,” it said.

According to data provided by AM Best, the top California homeowners/farmowners insurer by 2023 direct premiums written in the state was State Farm, with $2.75bn. It was followed by Farmers, Liberty Mutual, CSAA and Mercury Casualty.

The top California commercial property insurers by 2023 direct written premium were Farmers, Travelers, Liberty Mutual, Chubb and State Farm, according to AM Best figures.

In addition, the top property casualty company with a 75 percent or greater concentration of their total property portfolios in California was State Farm General Insurance, with $3.22bn of direct premiums written.

Given the actions that numerous carriers have taken in recent years, however, those rankings may have shifted significantly since then.

AM Best: Decision to write wildfire risk now “much more challenging”

In comments provided to this publication, Sridhar Manyem, senior director for industry research and analytics at AM Best, said: “We’ve seen California’s largest property insurers decide to limit new homeowners’ policies in the state or withdraw in recent years.”

He added: “These wildfires could very well exacerbate availability or affordability issues for policyholders in California, but what is problematic is that there is not one distinct reason companies have taken these pull-back actions – rather, there have been several explanations depending on the carrier, based on its market profile in the state and its experience.”

AM Best noted that some companies have struggled to raise rates sufficiently for them to be considered adequate for the exposures, while others have encountered difficulty in securing the needed reinsurance to support writing their homeowners portfolio.

“While these are individual carrier decisions, an event like this could make the risk-reward trade-off to underwrite California wildfire risk a much more challenging decision. The severity of the event – overall economic losses and insured losses – will be a factor, as will the impact of the event on each insurer, in determining prospective exposures by insurers and reinsurers,” Manyem said.

He continued that the increasing frequency of severe weather-related events is evident in the current wildfires affecting the Los Angeles area, which occurred outside of what has traditionally been considered wildfire season in California.

High value of real estate in affected areas to push up losses

Manyem noted that the fires were accelerated by winds speeds of up to 80 mph that combined with dry conditions.

“The affected areas have to deal with wind damage and fire losses. The four initial fires – Palisades, Eaton, Hurst and Tyler – have reportedly affected highly populated areas. We expect that insured losses will be significant though it is early to define the magnitude,” he said.

Manyem added: “The high value of real estate in some of those areas will likely generate large economic losses with insured losses depending on the respective coverage. On the back end, demand surge and rising inflationary pressures are additional factors that could drive claims-related costs upward.”

Insurers with concentrations in California and even the greater Los Angeles area likely will be more impacted, AM Best added, noting that it will continue to monitor the situation through interactions with rated insurers to assess the impact on financial strength ratings.

The rating agency added that the impact on the financial health of an insurance company will depend on concentration of insurance companies and the diversification of the company’s portfolio relative to its exposure.

“Insurers will re-examine their appetite for wildfire risk as it becomes highly unpredictable with respect to location, intensity and seasonality,” Manyem said. “There may be challenges with respect to affordability and affordability depending on the magnitude of the loss.”

AM Best also highlighted that California’s recent regulation requires catastrophe models to account for mitigation efforts by homeowners, businesses and communities.

The agency said that a wildfire catastrophe model currently under review by the state could enable insurers to better price this risk but added that the risk of wildfire is very high and very persistent “and the effectiveness of the program in reducing insured losses will boil down to affordability and the availability of appropriate coverage”.