The recent outbreak of wildfires in California is likely to have a negative impact on the Q4 earnings of re/insurers with property exposure in the state, but losses should remain within budget for most companies, according to Fitch Ratings.
The rating agency said that wildfire losses should not exceed the level anticipated by the industry when pricing catastrophe risk, which will be reflected in re/insurers’ catastrophe budgets for the quarter.
It noted that the recent fires are likely to become one of the costliest wildfire catastrophe-insured loss events ever for the property and casualty re/insurance industry, although it maintained that companies will not experience a major deterioration in financial strength.
Fitch also anticipates that losses will largely be borne by primary insurers, with reinsurance industry exposure stemming from aggregate catastrophe treaties that combine the wildfire losses with other catastrophe events throughout the year.
Nevertheless, most of the insurers affected by the wildfires are likely to be larger, national carriers, Fitch observed, who will be able to weather heavy losses due to their large capital bases and high financial strength ratings.
Given the high catastrophe-prone risk and higher value of homes in affected areas, a sizable portion of the coverage is also provided by the Excess and Surplus market, and may work to shift losses away from traditional large admitted insurers.
The total number of structures destroyed by the Camp, Woolsey and Hill Wildfires stands at 18,652 as of November 20, according to data from the California Department of Forestry and Fire Protection (Cal Fire), and recent estimates from catastrophe modeller RMS but insured losses in the range of $9 billion to $13 billion.
This will follow a $845 million industry loss due to a separate wildfire outbreak in July 2018, and marks a second consecutive year of major wildfire losses in California, as re/insurers also incurred around $13 billion of California wildfire losses in 2017.
Fitch estimates that each $1 billion of insured loss will add about 17 bps to the industry’s 2018 loss ratio, based on its $600 billion 2018 net earned premium forecast, while each $1 billion of homeowner insured loss will add about 120 bps to the industry’s homeowner 2018 loss ratio.
The U.S. industry all lines loss ratio and homeowners’ loss ratio in 2017 were approximately 76% and 79%, respectively, Fitch noted.
The insurance lines of business most affected by this catastrophe are personal lines – particularly homeowners, but also automobile – while commercial property and business interruption claims could also be significant.
Fitch’s analysis compares with comments from J.P. Morgan, who said that the recent wildfires will compound re/insurers’ Q4 losses and exceed catastrophe budgets, and from S&P Global, who said that losses would only constitute an earnings event but that re/insurers would have to re-evaluate their approach to covering this peril.
