U.S. wildfire insured losses could exceed $1.75bn: Guy Carpenter

Global reinsurance broker Guy Carpenter has estimated that, based on preliminary data, insurance industry losses from U.S. wildfire activity in 2015 are likely to reach and may even exceed $1.75 billion.

“Wildfire is a significant peril impacting insurers in the United States each year. Preliminary data indicates that 2015 insured losses from wildfires may approach or exceed USD 1.75 billion,” commented Tim Gardner, CEO of U.S. Operations at Guy Carpenter.

The 2015 U.S. wildfire season has seen a number of large fires, particularly in California, where insurance industry losses were said to have hit $1.15 billion in September, with an economic loss of $2 billion.

Guy Carpenter explains:

The wildfire threat in the summer of 2015 was amplified by a strong ridge of high pressure that created very hot and dry conditions in the western U.S. More than 9.27 million acres were burned by wildfires through October 8, as compared to the 10-year average of around 6.3 million, according to data from the National Interagency Fire Center.

“Wildfires are a complex peril due to a number of varying prediction factors such as temperature, rainfall deficit and wind conditions,” said James Waller, PhD, Research Meteorologist for Guy Carpenter. “As winter approaches, a strong El Niño should bring much needed rainfall to most of California and the Southwest, However, the Northwest will likely continue to experience dry conditions through the winter.”

At this stage of the year we are really only just entering the peak of the U.S. wildfire season, meaning that further losses are likely and the insurance, reinsurance and perhaps insurance-linked securities (ILS) exposure could rise further.

A number of ILS funds are exposed to U.S wildfire losses, through collateralized property catastrophe reinsurance treaties and also retrocession arrangements for cedants.

It’s also important to consider how terms expansion on aggregate reinsurance layers could see wildfires qualifying towards an erosion of aggregate retention levels, perhaps raising the chances of exposure for some reinsurers or ILS players.

At this stage any impact from the 2015 U.S. wildfire season is likely to be minimal to ILS funds, but the rising loss estimates should serve as a reminder that this is another peak risk that ILS capital is often applied to.