By Michael Loney

Jan 30 - (The Insurer) - Reinsurers will assume at least 30 percent of insured losses from the Los Angeles wildfires, while insurers’ first quarter earnings will also be significantly weakened, Moody’s has commented.

In a new report, Moody’s noted that reinsurers will “assume sizeable losses” from the wildfires.

The rating agency said that reinsurers will see claims from primary companies under a variety of reinsurance coverages, including quota share treaties and excess of loss property catastrophe coverages, as well as facultative and per-risk reinsurance.

“Additionally, most reinsurance contracts also cover assessments on insurers imposed by the California Fair Plan. Based on preliminary insured loss estimates, we expect the reinsurance sector to assume at least 30 percent of total insured losses,” the report said.

“Reinsurers will recalibrate their risk assessment and appetites, pricing levels, and terms and conditions for wildfire risk.”

Moody's expects losses to be broadly distributed across the global reinsurance sector. However, those with exposure to homeowners insurers with high concentrations in California, and the Fair Plan, could see larger losses relative to the peer average, it added.

However, Moody’s expects primary insurers to retain more of the losses than they would have a number of years ago because of the significant increase in the attachment points of most property catastrophe reinsurance coverages since 2023.

“The impact on reinsurance pricing is difficult to determine at this point. We think the wildfires are likely to provide some support to property catastrophe pricing during the mid-year reinsurance renewal periods, as the wildfire losses could erode significant portions of annual catastrophe budgets prior to the 2025 Atlantic hurricane season,” the report said.

“We also expect wildfire-exposed accounts to see significant scrutiny upon renewal as reinsurers recalibrate their risk assessment and appetites, pricing levels, and terms and conditions.”

Moody’s also noted that the share of losses covered by reinsurers will depend on the hours clause, radius clause and other event definitions within specific contracts.

Reinsurance policies limit coverage to a certain number of continuous hours of fire damage, with Moody's highlighting a range of 168-240 hours, with the starting time determined by the primary insurer to maximise recoveries.

Reinsurance policies typically allow insurers to pick a central geographic point of loss, it said, noting a radius range of 150 to 250 miles. Losses within the radius around that point are typically considered a single event.

“The Palisades and Eaton fires are a few dozen miles from each other, so they would be considered a single event for many reinsurance contracts,” the report said.

“Some reinsurance contracts may give primary insurers additional flexibility when determining whether the wildfires would count as a single event or two events. For example, some may allow the primary insurers to count the wildfires as separate events since Verisk PCS has labelled them as separate events,” it added.

Wildfires to “significantly weaken” Q1 earnings

Moody’s highlighted that risk modellers have issued estimates of insured losses, including losses to the Fair Plan, ranging from $20bn to $45bn for the wildfires, making it the largest wildfire loss in California history.

A large portion of the losses will be homeowners insurance coverage, it said.

“We believe wildfire losses will significantly weaken first quarter earnings for the industry,” the report said. “Most insured losses will be shared among standard and E&S homeowners insurers, the California Fair Plan and commercial property insurers, with smaller losses for fine art and collectibles, and auto insurers. The allocation of losses will depend on insurers' market shares in the affected areas.”

Moody’s expects that wildfire losses will not be a material capital event for large, well-diversified insurers but warned that the effects could be more significant for homeowners insurers with a high concentration of business in California.

It noted that it recently downgraded the ratings for Mercury General, reflecting the company's geographic concentration in California and meaningful exposure to natural catastrophes.

Discussing the impact on the Fair Plan, Moody’s said the plan has grown rapidly in recent years, and the Pacific Palisades is its fifth-highest wildfire exposure concentration, with about $5.9bn of exposure.

The Fair Plan has already received over 3,600 claims from the two wildfires.

“The potential financial toll of the Los Angeles wildfires on the Fair Plan is uncertain,” the report said. “About 22 percent and 12 percent of the structures destroyed in the Palisades and Eaton fires, respectively, are covered by the Fair Plan, according to the plan's estimates.”

The Fair Plan's reinsurance program is triggered after claims reach $900mn, which is more than double the cash surplus on hand. Reinsurance covers the next $350mn of claim payments, with various levels of co-insurance after that level up to $5.78bn of losses.

Moody’s said the last time the plan levied an assessment was in 1994.

The rating agency said that for the first $1bn in total personal lines and $1bn in commercial lines assessments, insurers can recoup half their share of the assessments through fees billed to policyholders.

If assessments exceed those amounts, insurers can fully recoup the assessments through policyholder fees subject to approval by the California insurance commissioner.

In addition, Moody’s noted the potential for subrogation.

“The causes of the fires have not yet been determined, but identifying the causes will help insurers determine whether they can subrogate claims,” the report said.

It added: “After some previous California wildfires such as 2018 fires in Paradise, California and Los Angeles County, insurers recouped some of their losses from the electric utilities when sparks from their equipment were shown to have caused the fires. Settlements from the utilities required years of negotiations, and many insurers sold their subrogation rights to third parties such as private equity funds prior to settlement.”

Looking ahead, Moody’s said that homeowners insurers may decide to pull back further in high- and medium-risk areas, and reduce geographic concentrations. This would impact availability in the standard homeowners market.

“We expect even more insureds to move to the California Fair Plan and E&S insurers,” the report said. “Insurers will likely require additional risk mitigation efforts, which could be costly for homeowners.

“As with other natural disasters, insurers, reinsurers and risk modeling firms will evaluate claims data and update models. The industry's views of wildfire risk will likely increase significantly.”