The ongoing outbreak of wildfires in California, which have reached record levels in terms of property destruction and deaths, are likely to mean that insurance and reinsurance industry losses from the wildfire peril will also reach a record level in 2018, according to A.M. Best.
The rating agency suggests that, given the extent of losses from wildfires and the destructive nature of California wildfire events over the last two seasons, that insurers will have to reassess their risk appetites and as a result their pricing for these risks, which also suggests that reinsurance capital providers will be likely to do the same.
The wildfires in California, both north and south, have burned huge numbers of acres and destroyed thousands of properties.
As of the latest updates, the Camp wildfire in Butte County has now destroyed 7,600 single residence properties, 95 multiple residence properties and 260 commercial properties, with another 859 so-called minor structures destroyed as well. A further 75 residential properties and 32 commercial properties have been damaged as well.
The Woolsey wildfire in the southern California county of Ventura has now destroyed an estimated 435 structures with 24 more damaged.
Firefighters held their containment lines yesterday, meaning neither fire has spread significantly since our update yesterday morning. But fire weather remains dangerous in the south and the fires are still raging.
Despite it being too early to make loss assessments, A.M. Best is confident enough to say that 2018 industry losses from wildfires “will be at record levels.”
The number of acres burned in 2018 is already nearly double that seen in 2017, the rating agency notes.
“The potential for historic losses was already likely before the Woolsey fire ripped through the wealthier area of Malibu, which has a median home value of approximately $2.9 million. Also at risk are many commercial structures and locations in the area that are used in the film and television industry,” the agency said.
But noted that primary insurers often limit their exposure to high-value properties such as these and cede more of the exposure that sits outside of their risk tolerances to their reinsurance providers.
“Despite a loss-affected 2017, most large writers in California are larger national companies that started 2018 with adequate risk-adjusted capital. The catastrophe events of 2018 will likely cause significant earnings volatility and could stress some balance sheets,” A.M. Best said.
The agency said that insurers did respond to some degree to the significant wildfire losses of 2017, but it now expects a much bigger response after a second year of record wildfire industry losses.
“The lessons learned from the 2018 events will again call for re-evaluation of their underwriting and risk management strategies. Additionally, the risk-scoring models insurers have been using to identify areas particularly exposed to wildfires and to better establish their risk appetite and tolerances will be severely tested,” explained the rating agency.
The upshot of this should be that, “In light of two severe back- to-back wildfire seasons, insurers may have to re- evaluate how they view risks in California and are thus highly likely to adjust pricing.”
A.M. Best highlights that the industry has already faced roughly $2 billion of losses from the Carr wildfire in northern California earlier this year.
That followed 2017 when homeowners and farmowners insurance underwriters in California faced direct losses incurred of roughly $16 billion, almost four times the $4.2 billion of losses suffered in 2016.
Commercial property underwriters saw their losses double from 2016 into 2017 as well and A.M. Best expects that commercial insurers will also face significant impacts from the 2018 wildfires.
While most of these insurers have adequate capital and prudent reinsurance arrangements, allowing them to absorb these kinds of losses, the fact they are facing major financial impacts year after year suggests they will be forced to rethink their appetites for this risk and as a result the pricing of it.
“The lessons learned from the 2018 events will again call for re-evaluation of their underwriting and risk management strategies,” A.M. Best explains.
The expectation remains that the ongoing California wildfire outbreak will drive losses to sources of third-party reinsurance capital, through structures like sidecars, private quota shares and ILS funds.
Catastrophe bonds remain exposed, in particular the $200m Cal Phoenix Re Ltd. (Series 2018-1) which provides electrical utility PG&E with third-party wildfire property liability insurance coverage.
Pacific Gas & Electric Co. and its parent were sued yesterday by over twenty victims of the Camp wildfire, claiming that the wildfire was started by PG&E’s infrastructure and blaming the utility for not adequately inspecting its powerlines.
The chances of PG&E being found liable for the Camp wildfire outbreak and as a result the Cal Phoenix Re cat bond being put at risk of payout appears to be increasing, but it will be some time before any determination is made.
As we wrote yesterday, the wildfire outbreak has dented the valuations and prices of some ILS funds, reflecting the fact that the potential impacts will run through the sector.
Further volatility is expected for some of the aggregate catastrophe bonds which cover insurers such as USAA, while other aggregate reinsurance arrangements are also likely to come into focus after these fires.
Given we could be looking at further billions of dollars of catastrophe losses flowing into reinsurance and ILS markets from California wildfires in 2018, it seems very likely that pricing will change.
Given the reinsurance market cycle now moves on a more localised level, in terms of geography, peril or program, it would make sense for any movements in primary insurers pricing for the wildfire peril to be reflected in reinsurance arrangements as well.