Autonomous raises its LA wildfire loss estimate to $25bn, $18bn from Palisades fire

Autonomous Research has raised its estimate for insurance and reinsurance market losses from the Los Angeles, California wildfires to $25 billion and the research firm believes as much as $18 billion of the total may come from the Palisades fire alone.

There have been no updates to the estimates for the number of structures destroyed or damaged by the ongoing fire situation in Southern California, with the total still being reported at around 12,300.

But analyst and research firms have been raising their estimates for insured losses, with the majority now suggesting a loss in the range of $15 billion to $25 billion, while some opt for a higher figure approaching $30 billion.

It remains too early for an accurate view and we still lack any official estimates from catastrophe risk modellers, but loss estimates almost all point to this becoming the most costly outbreak of wildfires for the insurance and reinsurance industry in California history.

In our article on January 9th, we cited the first estimate from Autonomous Research, where the company put the potential industry insured loss at $13 billion, with $8 billion expected from the Palisades fire, while the Eaton, Hurst and Woodley fires combined were expected to add up to $2.5 billion and additional commercial risk exposure could add a further $2.5 billion.

Loss estimates for the LA wildfires have since risen considerably, as we reported, and now Autonomous has conducted further analysis to come to a catastrophe loss estimate of $25 billion.

“We update our Los Angeles County insured loss estimate to $25bn across both private and public insurers from our initial $13bn expectations, published late Jan. 8th. As we laid out in greater detail in our previous note, we use 2018 and 2019’s Camp, Kincade, and Southern Californian wildfires as proxies while factoring in the risk of winds spreading the fires into more commercial areas. The fires have multiplied and spread over a significantly larger area since we last published, now affecting over 40,000 acres with preliminary estimates showing more than 12,000 structures affected. Despite the growth in the Palisades, Eaton, and Hurst fires over the weekend, we underscore the limited nature of coverage in California, particularly for personal lines exposures, and the tighter nature of today’s policies relative to those underwritten in the 2018-2020 fire seasons. For many policies exposed to wildfire risk, limits are lower and deductibles are higher than in past years, still offering some cap to the losses that private insurers may face,” the analysts explained.

The Autonomous analysts now estimate that the Palisades fire could contribute as much as $18 billion of the insurance market loss, with the Eaton, Hurst and other wildfires a further $4.5 billion and additional commercial risk exposure the final $2.5 billion.

On the Palisades fire they explained, “The affluent Pacific Palisades neighborhood remains likely to pose the greatest potential insured wildfire loss risk in US history, with home values averaging $3.5mm. With the LA Fire Department estimating more than 5,300 structures have been damaged or destroyed by the Palisades Fire, we ultimately derive an updated Palisades Fire loss of ~$18bn, closer to the Camp and Kincade Fire proxies owing to broader burn acreage and higher home values both slightly offset by the more restricted coverage offered by private insurers today relative to six years ago.”

Adding that, “Taken altogether, residential exposures to the Los Angeles County fires point to a $20bn+ industry loss figure.”

The analysts expect “moderate” impacts to reinsurance capital from the wildfires, as per-occurrence coverage begins to pay out for some insurers.

“Wildfires typically count towards both single event and aggregate reinsurance covers, and while the year is young for aggregate losses to kick in, we suspect per-occurrence coverages will incur moderate losses,” the Autonomous team explained.

While also commenting on the single versus multiple event terms, saying, “More importantly, reinsurers are likely to consider the week’s-worth of fires as a single event which increases the degree to which losses count towards aggregate limits, always a negative later in the year when wind season approaches.”

In addition and notable, the Autonomous analyst team believe that at these levels of industry loss, “The FAIR Plan faces potential insolvency.”

They say, “Overall, we point to $8bn of potential FAIR Plan losses — or 25% of total exposures — as a starting point for the state’s share of the wildfire loss. With a potential loss of that size, questions of FAIR’s insolvency remain front of mind, and private insurers potentially face a large bill should the FAIR Plan be unable to cover its claims obligations.”

Insolvency of the FAIR Plan would result in “stiff capital calls” for private insurers, Autonomous said, with a base case estimate suggesting as much as $1 billion in additional losses, but a bear case might suggest something approaching $5 billion with potentially “meaningful” impacts on private insurers.

The FAIR Plan has itself noted that it has access to the resources it needs to pay all claims, but this could level assessments across industry and policyholders.

The FAIR Plan has approximately $2.63 billion of per-occurrence reinsurance as well as its other financial claims paying capacity. The analysts appear to suggest it could blow through all of its resources, but at this stage this remains unknown.

It’s also worth noting here that some California lawmakers have tabled an assembly bill that calls for “catastrophe bonds” to support the FAIR Plan. However, it turns out these are not cat bonds in the ILS sense, rather traditional bond issuances used for financing and the lawmakers have just adopted the name, it appears.

Also read:

– California wildfires: Subrogation topic raised, as utilities come into focus.

– ICEYE satellite analysis: Over 10,900 buildings likely destroyed in Palisades and Eaton fires.

– Catastrophe bond price movements due to LA wildfire exposure.

– Evercore ISI: LA wildfire insured loss $20bn-$25bn. Could be one event under reinsurance.

– LA wildfire losses to “notably exceed” $10bn, could approach $20bn: Gallagher Re.

– Mercury says LA wildfire losses to exceed reinsurance retention.

– LA fires: “Considerable attachment erosion” likely for some aggregate cat bonds – Steiger, Icosa.

– LA wildfires: Over 10k structures destroyed. Insured losses up to ~$20bn, economic $150bn.

– LA wildfire losses unlikely to significantly affect cat bond market: Twelve Capital.

– LA wildfires unlikely to cause meaningful catastrophe bond impact: Plenum Investments.

– JP Morgan analysts double LA wildfire insurance loss estimate to ~$20bn.

– LA wildfires: Analysts put insured losses in $6bn – $13bn range. Economic loss said $52bn+.

– LA wildfires bring aggregate cat bond attachment erosion into focus: Icosa Investments.