California Wildfires Exacerbate Property Insurance Woes, Says AM Best
California’s property insurance market faces mounting challenges, according to a new commentary from AM Best. The issues stem from a combination of significant insurer pullbacks from the state and the recent Los Angeles wildfires, which may result in substantial financial losses.
The recent wildfires in the L.A. area could generate total losses of up to $164 billion, with insured losses potentially reaching $40 billion. On January 5th, Allstate Corp. became the fourth insurance carrier to report wildfire losses exceeding $1 billion. CEO Tom Wilson noted during a fourth-quarter earnings call that the pretax wildfire losses are anticipated to be approximately $1.1 billion, net of reinsurance.
AM Best’s commentary, titled “California Wildfires: Multiple Credit Negative Impacts for Insurers,” highlights the growing losses resulting from increasingly frequent and severe wildfires. These events have prompted several insurers to reduce their coverage offerings in the state. As a result, California homeowners have increasingly turned to the FAIR Plan and the non-admitted market for coverage.
“Although comparatively modest, the percentage of homeowners’ insurance premium written by surplus lines insurers has increased by nearly 10 times over the last decade with premium surpassing the $2 billion mark for the first time in 2023,” stated David Blades, AM Best’s associate director of industry research and analytics, in the commentary. “This activity reflects a substantial amount of premium leaving the admitted market and finding coverage in the non-admitted market.”
Data from the FAIR Plan, for fiscal years ending September 30th, illustrates this dramatic shift: a 276% increase in policies from 2018 through 2024. According to AM Best, the underwriting performance of the FAIR Plan and its supporting insurers was unfavorable between 2018 and 2021, primarily due to wildfire-related claims. The losses are expected to lead to more expensive reinsurance for the FAIR Plan. Furthermore, catastrophe bonds have suffered negative price movement in the secondary market due to their exposure to these wildfires.
Wildfire losses have, on average, driven bond prices down by 10% to 20%, the commentary reported. RenaissanceRe estimates that it will incur approximately $750 million in losses from these wildfires, and it anticipates that the overall industry impact will halt the downward trend in property-catastrophe reinsurance prices.
Insured and overall losses from the January wildfires continue to increase in the weeks following the blazes. These fires, which erupted overnight and were driven by hurricane-force winds, blanketed Southern California with smoke and destroyed thousands of properties.
Preliminary data indicates that insurers have paid out more than $4 billion in claims related to the two largest Los Angeles-area wildfires that swept through the region, destroying tens of thousands of homes earlier this month. Claims figures released on January 30th by the California Department of Insurance (CDI) show that 31,210 claims have been filed for home damage, business losses, living expenses, and other disaster-related needs. The CDI reports that $4.2 billion in claims have been paid so far.
The FAIR Plan, California’s insurer of last resort, reported that it had received over 3,200 claims as of January 28th for damages caused by the Pacific Palisades Fire and more than 1,200 claims related to the Eaton Fire.
These recent fires follow a year in which several insurance carriers began requesting rate increases and withdrawing from the wildfire-prone state. CalFire data underscores the severity of the problem, showing that seven of the state’s ten most destructive wildfires have occurred in the last decade.
In response, California Insurance Commissioner Ricardo Lara introduced what he calls a Sustainable Insurance Strategy to increase coverage in wildfire-distressed areas across the state. Commissioner Lara also announced a catastrophe modeling and ratemaking regulation in December, which will allow carriers to consider the models when setting rates. While the insurance industry generally welcomed these changes, S&P suggests that they may offer little immediate relief from the effects of the L.A. fires.
These fires are expected to compel property insurance carriers to raise rates, reduce coverage options, or implement a combination of both, in California and other high-risk regions, according to S&P.
