U.S. wildfire industry losses estimated at $5bn to $8bn by Moody’s

Western U.S. wildfires so far this year have damaged or destroyed around 9,657 residential and commercial structures, while burning more than 5 million acres and the toll for the insurance and reinsurance industry could be as much as $8 billion already, according to Moody’s.

Image: Noah Berger / AP.

Moody’s Investors Service said that insured losses are already significant for California homeowners insurers and commercial insurers, while insurers with exposure in Oregon, Washington and other western U.S. states are also facing a rising claims bill from wildfires in those states as well.

Based on an estimate from CAL FIRE of their being around 5,792 structures destroyed or damaged, and taking an average value of about $826,000 per structure, California’s wildfire insured property losses alone would be about $4.8 billion so far in 2020, Moody’s explained.

The estimate from California fire authorities now stands at 6,391 structures destroyed at the latest count we understand, meaning losses could be rising there.

Another 3,865 structures are estimated to have been destroyed in wildfires burning across Oregon, Washington and other western states, Moody’s said.

As those states have typically lower home values and construction costs, Moody’s said that it expects the per-structure loss to be lower than the California average.

As a result, the rating agency plants a current estimate for insurance industry losses as being in the $5 billion to $8 billion range.

This is a much higher figure than where the industry had been discussing losses at lately, with most discussions with our sources suggesting a $2 billion to $3 billion maximum cost to the insurance and reinsurance industry so far.

However, the Oregon fires have added a considerable addition, so it is possible that the industry toll is heading towards this range, if perhaps not quite in that range as yet.

Reinsurance markets will take their share of whatever the bill is, with Moody’s saying that reinsurers are expected to incur wildfire losses, through quota share, per risk and aggregate reinsurance arrangements.

Some of this will also hit capital markets players and ILS funds, it is assumed.

ILS fund manager Plenum Investments recently warned that the ongoing wildfires may put investor focus back onto aggregate catastrophe bonds, as some of these have faced losses on the back of wildfire events in the last few costly seasons.

Moody’s also warns of the potential for the COVID-19 pandemic to lead to higher insured losses as well.

“Given the strong recent recovery in the housing construction market following the COVID-19 shutdown in second-quarter 2020, the increase in demand for construction labor and materials following the wildfires and other recent catastrophes has the potential to lead to higher insured losses,” the rating agency warns.

There is also likely to be a burden from additional living expenses for insurers in California and Oregon, where hundreds of thousands of people have faced evacuations from their homes.

“Additional living expenses are typically capped at 30% of a dwelling’s value and are paid only if the property is damaged or if the property has been subject to mandatory evacuation,” Moody’s explained.

The rating agency also noted that some commercial property insurers would be expected to face business-interruption claims as well, further exacerbating the overall industry loss impacts.

All of these factors means the eventual bill that flows to the reinsurance market may take some time to become clear, with some insurance-linked securities (ILS) funds almost certain to face a level of impact due to the wildfire activity so far.

Of course, it remains relatively early in the wildfire season for the western United States, meaning there is ample potential for further destructive and costly wildfires to occur and further losses to flow to the insurance and reinsurance market this year.

Overall, Moody’s believes that 2020 is now already the third most costly years for wildfire losses, following 2017’s $12 billion and 2018’s $13 billion of industry losses.

As a result, Moody’s expects the 2020 wildfire season will add further fuel under rising reinsurance rates, ensuring more hardening into 2021 renewals.