By David Bull

Jan 29 - (The Insurer) - RenaissanceRe CEO Kevin O’Donnell has said that cat models will need to “steepen the curve in the tail” to reflect the increased frequency of severe wildfire events, as he also suggested property cat rates need to “remain firm or even increase” in the aftermath of the devastating events in the LA area this month.

And the Bermudian’s group CUO David Marra told analysts on its earnings call Wednesday morning that the reinsurer was already expecting about $10bn of new demand coming to the market this year, which is now set to increase as companies review their reinsurance needs and likely purchase backup covers for the remainder of the year.

The Bermudian reinsurer disclosed in its earnings Tuesday after markets closed that it is expecting a pre-tax net negative impact of $750mn from the California wildfires, based on a market loss of $50bn.

“The level of destruction in the affected areas is truly catastrophic. An important component of our purpose is protecting communities. By rapidly paying claims, we hope to reduce the impact of this [tragic] event of the many people who have lost homes or otherwise have had their lives disrupted,” O’Donnell commented on this morning’s call.

He described the wildfires as a tail event for the peril, both in terms of absolute dollar loss and with respect to return period.

“While our models performed well in our assessment of return period, a loss of this magnitude implies that both [our] models as well as the vendor models will need to steepen the curve in the tail to better reflect the higher frequency of severe events,” the executive added.

He said that in addition to climate change as a driver of larger and more frequent natural catastrophe losses, human behaviour is a contributor, as he cited the example of “dense building with combustible materials in [the] wildfire urban interface” as a major factor in the California wildfire loss, along with land management practices.

O’Donnell said that RenRe’s estimate is based on a 1.5 percent share of the aggregate insured loss, but that this has the potential to see material variation based on a number of factors.

Among these are the high values of properties located in the impacted areas, including a large component of fine art and other scheduled coverages, as well as the influence of elevated demand surge on replacement cost values.

Additional living expense impacts will also be magnified by competition for temporary housing of a similar character to damaged properties, he suggested, as he pointed to other variables including smoke damage, and assessments related to the California Fair Plan, along with the potential for subrogation recoveries from the California Wildfire Fund.

“The industry losses we expect from the California wildfires are at a scale we would expect them to affect supply and demand for reinsurance. The first quarter of 2025 will be the third consecutive quarter of elevated catastrophe losses.

“Most of our US property catastrophe programs are loss impacted. This will create increased demand for our products. We have the capital and we have the appetite to continue providing protection that our clients and states like California clearly need. In order to do so, however, property catastrophe rates need to remain firm or even increase,” O’Donnell stated.

The executive further commented on the step change in pricing and terms and conditions for property cat reinsurance that took place two years ago. At the time he said that the change was to the benefit of the industry as adequate rates would allow it to continue providing protection to customers at the “appropriate level, which is balance sheet protection”.

“The California wildfire loss is a good example of the value of our approach to the step change. The magnitude of loss we anticipate paying is consistent with [the] tail nature of this event, and we were paid appropriately to protect against this risk,” he continued.