California wildfires to cost industry up to $10.5bn: AIR Worldwide

The California wildfires are now thought likely to cost the insurance and reinsurance industry up to $10.5 billion by risk modeller AIR Worldwide, a significant uplift on its first estimate after the firm surveyed the affected areas and reassessed replacement values for certain properties.

It’s a significant increase from AIR’s first estimate of $3 billion, issued in late October, but the catastrophe risk modelling firm has now completed reconnaissance missions to the affected area and analysed the findings from its damage surveys.

AIR has also acquired new information about insurance policy terms, and re-examined some of the replacement values of high-value homes within its industry exposure database (IED), to help it come to a more accurate total.

The company now estimates the costs of the California wildfires, specifically the Tubbs, Nuns, Atlas, Redwood, and Sulphur fires in California, at between $8 billion, which is where Aon Benfield recently pegged its estimate, to as much as $10.5 billion, now the highest estimate of insurance and reinsurance market losses from these wildfires.

AIR said that the estimate includes damage to residential properties, mobile homes, commercial lines of business, and automobiles, as well as direct business interruption losses. So this estimate does include demand surge (increases in rebuild costs that result from shortages of labor and materials), but does not take into account extra expenses such as debris removal.

The risk modellers notes the uncertainty over the contribution to the loss from California wine growing industry, saying that uncertainty remains regarding losses to vineyards and wineries, as values of equipment and machinery could exceed the expected value of contents that its IED contemplates.

However, AIR expects that residential losses will dominate the total industry loss.

With the estimates now surpassing $10.5 billion, the recent California wildfires are set to be the most costly ever to the insurance and reinsurance industry by a long way.

Whether $10 billion is an important marker, in terms of a trigger on any all natural peril industry loss warranties (ILW’s) or contracts is unclear at this time, but the rising bill is certain to mean more exposure for collateralized reinsurance and other private ILS contracts that cover the wildfire peril.

Loss announcements from major insurers all point towards an industry tally of around the $10 billion mark now, with Allstate the latest to report a $452 million hit yesterday, following Travelers that said it expects up to $675 million of loss after reinsurance, as well as AIG that said it expects around $500 million after reinsurance, and USAA that pegged the wildfire loss at up to $581 million.

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