Wildfire losses should have been priced in, says Fitch

While losses from the ongoing California wildfire outbreak are set to likely be the most significant from the peril ever faced by insurance and reinsurance markets, rating agency Fitch says they should still have been priced into policies.

“While insured losses are certain to be significant, they are expected to remain within the level of losses that the insurance industry anticipates when pricing catastrophe risk into premiums,” the rating agency said in a release yesterday.

It’s a good point that Fitch raises, that both insurers and reinsurers should have been pricing California focused property insurance policies and also any reinsurance or retrocession programs for underwriters with California wildfire exposure, to include the risks of a double-digit billion dollar wildfire industry loss event.

After the heavy California wildfire loss toll from 2017 you’d think it a given that wildfire exposed policies had been priced to include a loss as big as we now see unfolding from the Camp and Woolsey fires.

Therefore there shouldn’t be any surprises, should there?

As a reminder, catastrophe risk modeller RMS said that the wildfires will drive an insurance industry loss of between $9 billion and $13 billion, but that was based on around 12,000 residential and commercial structures being destroyed by the blazes.

Now, with 14,930 residential and commercial properties destroyed and another few thousand minor structures as well, at the latest count, it seems likely the industry loss will rise towards the upper-end of that range or even exceed it.

With the industry already discussing the potential for these wildfires to be the tipping point as far as pricing goes, it seems that even if a wildfire industry loss of this level was priced in the future will be higher pricing for California property owners.

Given that this is the second year running for major wildfire losses the industry would be foolish not to thoroughly reassess its risk appetite for the wildfire peril in California.

As a result, there should also be a reassessment of reinsurance pricing for the peril as well, on top of the expected assessment of catastrophe reinsurance pricing in general as 2018’s losses mount up on the heels of the record level seen in 2017.

So whether the losses were priced in or not, it seems there will be an industry reaction. At least that is the talk so far and a number of sources have suggested that the tone has changed on pricing in January 2019 renewal discussions, now that the fire impact is becoming clearer.

We’ll have to wait and see whether it has a meaningful effect, or whether weight of capital and appetite for risk continue to moderate pricing response across reinsurance at 1/1.

Fitch said that the impacts of these wildfires will negatively impact fourth-quarter earnings of companies with material property exposure in California, but that generally the companies affected will be the major national insurers with larger capital bases and higher ratings.

As a result, Fitch does not expect that these companies will find their ratings dented, if they only take a hit from the wildfires that is commensurate with their market shares.

Fitch estimates that for each $1 billion of wildfire industry loss, around 17 bps is added to the industry’s 2018 loss ratio based on an almost $600 billion 2018 net earned premium forecast and each $1 billion of homeowner insured loss adds about 120 bps to the industry’s homeowner 2018 loss ratio for the year.

The expectation is that primary insurers take the bulk of the loss still, but it’s evident that reinsurance capital will take a share including through the insurance-linked securities (ILS) market.

Fitch said that aggregate treaties will be a major source of the reinsurance market loss, but there is also expected to be quota share impacts, retrocession losses and also ILS fund losses through collateralised reinsurance contracts, as well of course as the PG&E sponsored Cal Phoenix Re wildfire cat bond also being at-risk.

Read our previous coverage of this wildfire outbreak:

California wildfire properties destroyed rises another 8% to 18,652.

Mutual & listed ILS funds decline further on wildfire threat.

Modest wildfire impact possible for Pioneer ILS Interval Fund.

Cat bond funds take NAV hit on wildfire cat bond write-down.

RMS puts Camp & Woolsey wildfire losses at up to $13 billion.

California wildfire losses rising, destruction nears 15,500 structures.

PG&E’s wildfire cat bond marked down for loss, traded at distressed price.

USAA cat bond & private ILS also at risk of wildfire losses: Twelve Capital.

PG&E sued over Camp wildfire, putting Cal Phoenix Re cat bond in the frame.

Wildfires could cost insurers $5bn to $10bn: Credit Suisse analysts.

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

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

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

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

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