Wildfires to drive up to $6bn industry insured loss – Moody’s

The current California wildfire outbreak is expected to drive losses of between $3 billion to $6 billion to the insurance and reinsurance industry, while there will also be an element of BI and demand surge to deal with as well, according to Moody’s Investors Service.

Moody’s based its estimate for insured wildfire losses from the current outbreak, so the Camp, Woolsey and Hill wildfires, on the number of properties reported destroyed and average wildfire property loss values.

The rating agency assumes a statewide average wildfire loss value of $981,000 per structure, based on data from past wildfires in 2018 dollars.

Assuming 6,852 structures destroyed, the latest figure Moody’s had at the time of its reports writing, it says losses could be as much as $6.8 billion so far.

However, Moody’s explains that the average property value is lower in the town of Paradise that was destroyed by the Camp wildfire, hence it opts for an insurance and reinsurance industry loss range of $3 billion to $6 billion.

This is aligned with the up to $4 billion estimate provided by analysts at Morgan Stanley last week.

In our latest article on the wildfires, published earlier today here, we explained that the number of structures has risen further to almost 8,400 structures across residential properties, multiple residence properties and commercial properties, plus another 859 so-called minor structures.

Hence, the estimate range that Moody’s provides is likely to shift upwards somewhat, we’d imagine.

Only using the 8,400 structures and an average wildfire loss value of $500,000 per structure you get to $4.2 billion.

Take into account that the properties destroyed in Malibu and by the Woolsey wildfire tend to have average values of over $2 million and it’s easy to see that the average loss value could be much higher than that.

Hence, we’d suggest the loss range will easily settle at $4 billion plus, perhaps running to $6 billion or even higher, once all the minor structures are taken into account and a few other vectors of loss.

Add in all of the insured losses attributable to autos and other vehicles and it’s easy to imagine that the insurance and reinsurance market toll could settle closer to the upper end of Moody’s range, at around $6 billion.

So given the increase in structures destroyed since Moody’s estimate was made, it seems likely that factoring in all loss vectors the industry total will be nearer the upper than the lower end of $3 billion to $6 billion.

Moody’s also notes another wildcard, that demand surge could affect claims values.

“Given already high construction demand from the 2017 and 2018 wildfires and a strong housing construction market, the spike in demand for construction labor and materials following the three wildfires will lead to higher insured losses,” the rating agencies analysts explained.

Other loss vectors that need to be considered include additional living-expense claims, given that around 300,000 residents have been evacuated from their homes due to the wildfires. These expenses are typically capped at 30% of
a dwelling’s value, Moody’s said and only paid if the property is damaged or if the property has been subject to mandatory evacuation.

On top of this, Moody’s also expects that some commercial property insurers will face business-interruption claims.

So the expected bill for insurance and reinsurance interests to pay will rise well into the billions of dollars it seems, with a share falling to ILS funds, collateralized reinsurance and retrocession investors and other third-party capital vehicle investors as well.

Also read:

Wildfire losses to hit record in 2018, pricing needs to change: A.M. Best.

Stone Ridge & CATCo fund prices dented by California wildfire threat.

California wildfires destroy more property, but industry losses uncertain.

Cat bond price volatility & discounts expected from wildfires: Plenum.

California wildfire most destructive ever, multi-billion losses expected.