California wildfire most destructive ever, multi-billion losses expected

The current outbreak of wildfire activity in California is now the most destructive on record and joint deadliest, with the Camp Fire now having destroyed more than 6,700 structures, while the Woolsey Fire has expanded further and as a result multi-billion dollar losses are to be expected for insurance, reinsurance and ILS market interests.

The Camp, Woolsey and also Hill wildfires have all expanded significantly over the weekend, fanned by strong Santa Ana winds and tinder dry conditions. The Santa Ana wind conditions are expected to continue through the start of this week and fire weather in the region remains critical.

The full extent of the devastating impact from the Camp Fire on the town of Paradise, California is now clear, with the town largely burned as 6,453 homes and 260 commercial properties have been completely destroyed.

This puts the Camp Fire, in Butte County, as the most destructive California wildfire on record and likely means it will also become one of, if not the costliest as well. This fire is set to drive billions of insured losses once the full toll is understood.

The Camp Fire continued to expand and has now burned over 110,000 acres of land and is estimated to be 25% contained by fire fighting crews.

However, 15,500 structures remain under threat according to the fire authorities in California, so the damage costs may continued to rise over the coming days, especially as the dangerous fire weather conditions continue.

The Woolsey Fire, in southern California’s Venture and Los Angeles Counties, burned into Malibu over the weekend destroying so far 177 residences and damaging another 2 in this high-value property zone.

The Woolsey fire has now burned 85,500 acres and is only 15% contained still, so further destruction of property is expected here as well. This fire is estimated to threaten 57,000 structures and with Santa Ana winds expected again the loss from this fire may continue to rise.

Meanwhile the Hill Fire, also in Ventura County, has burned 4,351 acres and is now 75% contained, with only 2 homes reported as destroyed by this wildfire.

With the wildfires still burning and dangerous fire weather conditions set to continue, it is far too early for the insurance, reinsurance and insurance-linked securities (ILS) markets to have a reasonable picture of the eventual losses they will bear.

But early indications, including from broker Aon, suggest that multi-billion dollar impacts are assured, given the number of properties destroyed.

But the eventual industry loss toll is likely to be significant, in wildfire peril terms, as the Camp Fire has destroyed over one thousand more structures than the Tubbs Fire in October 2017, which is estimated to have cost insurance, reinsurance and ILS interests as much as $8 billion.

The Camp Fire is already the most destructive California wildfire on record and the joint most deadly having killed 29 so far (200 remain unaccounted for as well), but it may also become the most costly as well.

While we know the numbers of properties destroyed is now the highest for a single wildfire outbreak, we do not yet know the number of cars and vehicles destroyed as well, but this is expected to be significant too.

With hundreds of thousands of residents evacuated from the threat of the Camp and Woolsey fires in particular, some insurance firms will also be facing a significant number of claims for covering evacuation costs, as well as for the damage to burned and destroyed properties and automobiles.

Major insurers including AIG, Travelers, USAA and Allstate are expected to take their share of these losses and if the industry loss approaches as high as last year’s wildfires in October and December, which together were assumed to cost the insurance and reinsurance industry around $13.5 billion, these large insurers will call on reinsurers to pay a share of their losses from the fires.

AIG in particular could trigger its aggregate reinsurance protection with the impacts of these latest California wildfires, driving a further share of its losses to its reinsurance partners.

The cause of these wildfires remains under investigation, but already there have been media reports that suggest electrical utility PG&E’s power lines or infrastructure could have sparked the Camp Fire outbreak.

Of course, PG&E is the beneficiary of insurance provided by a recent catastrophe bond issue that is exposed to California wildfire outbreaks, the $200m Cal Phoenix Re Ltd. (Series 2018-1).

The Cal Phoenix Re cat bond provides the utility with third-party wildfire property liability insurance coverage, so could become considered at-risk should PG&E’s infrastructure be deemed responsible for any wildfire outbreak.

It will likely take some time for investigations to be completed, looking at the cause of the wildfire. But reports from media and the local fire authorities suggests that PG&E’s power lines in the region may be in question, at this time.

As well as PG&E’s wildfire liability cat bond, another Californian utility Sempra Energy also has a $125m SD Re Ltd. (Series 2018-1) cat bond in-force.

With the Camp Fire having destroyed so many properties and set to become one of the costliest California wildfires ever losses will flow through to ILS investors, with the potential for some losses to ILS funds, collateralized retrocessionaires, private ILS transactions, collateralized quota share reinsurance arrangements and reinsurance sidecars.

Should PG&E be named as linked to the starting of the Camp Fire, through its power lines or infrastructure, then catastrophe bond investors could also face some losses from this outbreak of California wildfire activity, although for that to happen and the cat bond to be triggered the utility would need to face costs in excess of the initial attachment point of $1.25 billion.

As we said last week, these new catastrophe bonds bring an interesting dimension to wildfire activity for the ILS market, as it’s important to understand their cause and what started them, because any wildfire that was ignited by these utility owners infrastructure could put their cat bonds at risk.

Broker Aon’s Impact Forecasting unit said that it expects the aggregate cost of these wildfires will result in a multi-billion dollar insurance industry loss.

Impact Forecasting said, “The scope of confirmed damage already attributed to the Camp and Woolsey fires indicates that a significant financial cost is likely; especially when compared to damage and resultant costs incurred from recent fires in 2017 and 2018 in Northern and Southern California. It is anticipated that the insurance industry is facing a multi- billion-dollar aggregated payout from the November fires.”

Prior to these November outbreaks, U.S. wildfire industry losses had cost the insurance and reinsurance industry an estimated $1.78 billion already in 2018.

This outbreak will eclipse that figure and after the near $16 billion of industry loss caused by wildfires in 2017 (according to Aon data), 2018 now looks set to be another destructive and costly year.

Also read:

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

California wildfires destroy more property, but industry losses uncertain.