The longer-term impact on California’s insurance market from the Los Angeles County wildfires may be substantial, as insurers will further re-examine their appetites for wildfire risk as it has become highly unpredictable concerning location, intensity and seasonality, according to a new report from AM Best.
The Cal Fire Authority has noted that the LA County wildfires are still burning and have now destroyed more than 10,000 structures.
Insurance industry loss estimates range from $10 billion to $20 billion and could increase if the fires continue to spread.
As for the total loss economic loss figure, forecaster AccuWeather recently increased its preliminary estimate to between $135 billion and $150 billion.
AM Best’s new report observed that insured losses from the wildfires will be substantial, with insurers that have more concentrated exposures likely to face greater negative impacts.
Meanwhile, the impact of the wildfire losses will reportedly be felt less by national carriers because of their considerable risk-adjusted capital positions.
The rating agency continued, “Past weather-related events that have affected California have created earnings events for these insurers as opposed to capital events affecting their balance sheet strength.
“However, because of unfavourable results over the last few years, State Farm General Insurance Company, the most concentrated California carrier from a total property insurance perspective, has sought significant rate increases for homeowners, condo owners and renters in the state, in addition to announcing plans to substantially decrease its policy count.
“Other insurers also have sought rate increases and taken initiatives to shrink their portfolios or cease adding new exposures.”
David Blades, associate director, Industry Research and Analytics, AM Best, commented, “California residents have dealt with an increasing variety of severe weather events in recent years such as wildfires, along with a prolonged drought and multiple flooding events caused by atmospheric rivers.
“The changing weather patterns and climate conditions have resulted in increased volatility that has negatively impacted the results of insurers in the homeowners and commercial property lines.”
The rating agency’s report also highlighted that California recently introduced regulations permitting the use of reinsurance costs as a factor in pricing and allowing catastrophe models to account for mitigation efforts by homeowners, businesses, and communities.
“A wildfire catastrophe model currently under review by the state could enable insurers to better price this risk,” AM Best said.
However, wildfire risk remains exceptionally high and persistent, and AM Best noted that the program’s effectiveness in reducing insured losses will ultimately depend on affordability and the availability of appropriate coverage.
AM Best concluded, “Insurers will re-examine their appetite for wildfire risk as it becomes highly unpredictable with respect to location, intensity, and seasonality.
“There may be challenges with respect to affordability, depending on the magnitude of the loss. AM Best will continue to monitor the situation to assess the impact on insurers’ financial strength ratings.”
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