California wildfire season could surpass 2017’s $13bn of losses: A.M. Best

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Given the significant start to the California wildfire season in 2020, as well as the fact some of the ongoing blazes are burning in areas that are less typical, but also feature property concentrations, the current season has every chance of surpassing 2017’s roughly $13 billion of insurance and reinsurance market losses, A.M. Best said.

california-wildfire-image-noah-berger-ap

Image: Noah Berger / AP.

California’s wildfires continued to destroy more structures and properties over the last 24 hours, with almost 2,300 buildings that are potentially insurable now confirmed as destroyed in the current season.

As we said yesterday, an estimate from Moody’s Investors Service suggests insurance and perhaps reinsurance market losses from the wildfires in California are already at over $1.5 billion.

There’s a long way to go in the wildfire season which typically peaks in the latter months of the year, meaning there is plenty of time for the current fires to cause more damage and for new wildfires to ignite and threaten property, lives and livelihoods in the state.

Rating agency A.M. Best said, “The 2020 fires are different in that they are happening in coastal areas that do not usually burn. Based on acreage, the number of structures destroyed, and the geographies affected, 2020 has the potential to be at least as costly as 2017 with regard to insured losses.”

The rating agency also noted that it expects the 2020 fires, “will affect some excess and surplus lines insurers who may have stepped in after 2018 to take advantage of the rate increases and the supply dynamics.”

Of course that could send some of those packing, if we do have another particularly costly California wildfire season, so issues around availability and affordability of insurance in the state’s wildfire exposed areas will likely continued and reinsurance costs are also likely to continue to rise.

That said, “Much of the market share in California is held by the larger national companies (Exhibit 3) with significant capital to manage this peril, as well as effective risk management strategies, including robust reinsurance programs,” A.M. Best explained.

The situation in reinsurance markets could also weigh on insurers ability to operate in California, if the wildfires cause another year of significant industry losses.

“Reinsurers and alternate capital may demand significant rate hikes, which would result in higher reinsurance costs for primary carriers and make the risk/reward trade off to underwrite California wildfire risk a much more challenging decision,” A.M. Best said.

Adding that, “The 2018 wildfires caused the largest price increases in retro markets and third-party capital and we may see a much more focused retreat from these risks, as losses accumulate.”

There is every chance reinsurance and ILS capital retrenches away from California wildfire exposed areas, or reprices significantly again, if the 2020 wildfire season does prove as impactful and costly as 2017.

In terms of the blazes ongoing, the LNU Lightning Complex wildfire reached almost 370,000 acres and is now 35% contained, but still burning across Napa, Sonoma, Solano, Lake & Yolo Counties.

The LNU complex wildfirs have now destroyed at least 1,080 structures, with another 272 damaged and still 30,500 structures under threat.

The SCU Lightning Complex wildfires are also now close to 370,000 acres, so it and the LNU make up positions two and three in the largest wildfires on record in California, but the order is a moot point at this stage, both being so similarly sized.

The SCU Complex fires are now 35% contained, with 28 structures destroyed, 20 minor structures also destroyed and another 9 are damaged. More than 20,000 structures remain under threat of this SCU set of fires.

The CZU Lightning Complex wildfires, burning across San Mateo and Santa Cruz counties, has again destroyed more residential properties in the last 24 hours. Burning in a high-value area, this fire will be contributing a significant proportion of insured losses so far.

The CZU Lightning Complex wildfires have now burned more than 81,000 acres and are now 24% contained, a slight improvement again on yesterday.

The CZU wildfires have now destroyed 746 structures (up around 156 in a day), over 516 of which are residential properties (up 100 on the prior day), 1 a multi-residential property, 52 non-residential commercial and 177 minor structures destroyed, while another 82 structures have been damaged and still over 13,300 additional structures are considered under threat from this blaze.

In addition, hundreds of other wildfires continue to burn across California and are impacting a wide area, with some more property damage seen. But these three blazes remain the major threat and source of property damage of concern to the insurance and reinsurance market at this time.

Wildfires in 2020, even at this early stage of the California season, have already burned more acres than the whole of the 2019 season. The 2020 California wildfire season has now burned more than 1.6 million acres, which is approaching the over 1.8 million burned in 2018.

Given the still early stage of the California wildfire season, the chances of a reinsurance market hit and so the potential for some losses to fall to the ILS market, is increasing steadily as the number of properties damaged and destroyed increases.

In recent severe wildfire seasons some of the most impactful fires were seen in October and November, meaning there is much longer to go for the overall impacts to worsen as the season progresses.

Reaching $13 billion of industry losses would require some far more severe blazes, in terms of property damage, than we’ve seen so far this year. But with two of the largest wildfires on record still burning and weather expected to heat up again from the weekend, the spread of these fires could begin again, threatening an increasing toll.

Recall, in recent severe and costly wildfire seasons for the reinsurance industry, some of the most impactful and expensive blazes have been much later in the year.

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