Reinsurance News

California wildfire losses to reach record levels in 2018: A.M. Best

14th November 2018 - Author: Matt Sheehan

The Camp and Woolsey Wildfires, which continue to burn through vast areas of the Butte, Ventura and Los Angeles Counties in California, are expected to contribute to what will likely be a record year for insured wildfire losses in the state, according to A.M. Best.

wildfireThe rating agency noted that the number of acres burned in 2018 is already nearly double the 2017 total and 2.5 times the five-year average, with the Camp and Woolsey fires having burnt through 130,000 acres and 97,000 acres, respectively, at present and more destruction expected.

They have also destroyed a combined total of 8,295 structures, including buildings in the affluent area of Malibu, which has a median home value of $2.9 million and contains many buildings and locations that are used in the film and television industry.

A.M. Best noted that many primary insurers limit their exposure to these kinds of high-value properties by ceding their exposure to reinsurers, meaning the Woolsey Fire in particular could entail substantial losses for the reinsurance industry.

These will add to losses incurred during the Carr Wildfire in Northern California earlier this year, which could cause industry losses of up to $2 billion.

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Recent estimates by Morgan Stanley put the Camp Wildfire’s cost to the insurance and reinsurance industries in the range of $2 billion to $4 billion, while Aon’s Impact Forecasting team agreed that it would drive multi-billion dollar insured losses.

For homeowners and farmowners writers in California, losses increased by nearly four times in 2017 to $16.0 billion, A.M. Best said, up from $4.2 billion in 2016, with most of the increase attributable to wildfire losses.

The top ten companies in terms of direct premiums written accounted for 76.4% of market share during this period, roughly in line with their 78.8% share of direct losses incurred.

Half of these insurers had outsized losses compared to their market share, highlighting some geographic concentration and larger exposures to certain affected areas, while the group’s direct loss & adjustment expense ratio in 2017 was on average 3.7 times higher than in 2016.

Homeowners and farmowners insurers most exposed to California wildfires include State Farm Group and Farmers Insurance Group, who have 17.1% and 15.7% market share, respectively, and who incurred 24.8% and 11.6% of 2017 losses.

In comparison, commercial property insurers’ losses roughly doubled in 2017 and will likely continue to increase in 2018, with the direct loss & LAE ratio also doubling for companies reporting losses of at least $1 million.

Commercial property insurers most exposed to California wildfires include Farmers Insurance Group, Travelers, Liberty Mutual, and Nationwide, who have 16.3%, 8.8%, 8.3%, and 6.0% market share, respectively, and who incurred 12.6%, 7.9%, 9.5% and 10.2% of 2017 losses.

Most large writers in California are larger national companies that started 2018 with adequate risk-adjusted capital, but A.M. Best suggested that the year’s catastrophe events will likely cause significant earnings volatility for these re/insurers and could stress some balance sheets.

Re/insurers responded to some extent to the wildfires of 2017, but a second consecutive year of heavy losses will again call for re-evaluation of underwriting and risk management strategies, A.M. Best claimed, as well as new risk-scoring models to better establish appetite and tolerances.

The firm added that it would provide updates on the California wildfires as they become more contained and as insurers and reinsurers are able to better assess the situation and generate more detailed loss estimates.

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