Analysts at Autonomous have increased their insured loss estimate for the ongoing Los Angeles wildfires by 92% to $25 billion, forecasting a significant loss of up to $8 billion for California’s FAIR Plan.
As the fires continue to burn and affect over 40,000 acres, with more than 12,000 structures reported to have been either damaged or destroyed, Autonomous has update its insurance industry loss estimate from the $13 billion published late January 8th.
Now, the firm is estimating insured losses of $18 billion from the affluent Pacific Palisades neighbourhood fires, which according to officials, has damaged or destroyed over 5,300 structures. On top of this, analysts estimate insured losses of $4.5 billion from the Eaton, Hurst and other, smaller blazes in parts of LA.
Further, Autonomous continues to model around $2.5 billion of additional commercial exposures at risk in LA County, which is more than double the roughly $1 billion of commercial losses associated with the 2023 Maui wildfires.
Together, the fires and additional commercial exposure at risk in the region points to an insurance industry loss of $25 billion, which analysts say could result in the attachment of per-occurrence reinsurance coverages.
“We expect the Los Angeles County wildfires to result in moderate impacts to reinsurers,” say analysts. “As we previously wrote, wildfires typically count towards both single event and aggregate reinsurance covers, and while the year is young for aggregate losses to kick in, we suspect per-occurence coverages will incur moderate losses.”
Analysts go on to highlight Mercury General’s announcement last week that its losses from the wildfires will exceed the $150 million retention level on its per-occurrence reinsurance.
“More importantly, reinsurers are likely to consider the week’s-worth of fires as a single event which increases the degree to which losses count towards aggregate limits, always a negative later in the year when wind season approaches,” analysts say.
Of the $25 billion insured loss, Autonomous expects as much as $6 billion to $8 billion to fall to the California FAIR Plan, which at that scale, faces potential insolvency.
“As industry loss estimates have climbed and been refined, investor concerns are shifting to the impact on California’s FAIR plan. Gallagher Re estimates the FAIR Plan has ~$24bn of exposure in the areas affected by the Los Angeles County wildfires, with $6bn of exposure to the Palisades fire alone,” explain analysts.
The FAIR Plan, the state’s insurer of last resort, typically only covers basic property damage and caps residential policies at a $3 million limit. For commercial policies, standard policies are capped at $20 million per location limit. Although, the introduction of reforms to offer a second “high value” commercial coverage option, which includes limits up to $20 million per building with a total maximum limit of $100 million per location, complicates the Plan’s potential share of losses.
“Overall, we point to $8bn of potential FAIR Plan losses — or 25% of total exposures — as a starting point for the state’s share of the wildfire loss. With a potential loss of that size, questions of FAIR’s insolvency remain front of mind, and private insurers potentially face a large bill should the FAIR Plan be unable to cover its claims obligations. Testimony given by the FAIR Plan to state lawmakers last year indicates the Plan has $2.5bn of reinsurance coverage in addition to ~$700mm of cash on hand,” say analysts.
The FAIR Plan does purchase extensive reinsurance coverage to help stabilise the market by transferring some of the risk, and also to avoid an assessment on insurers, ultimately reducing the possibility of it becoming insolvent.
Autonomous is now the second to increase its insurance industry LA wildfire loss estimate to $25 billion, and there’s potential for this to move higher as the fires continue to spread and conditions challenge containment efforts.
It’s also worth noting that the question of potential recoveries from subrogation of claims has now emerged in relation to the LA wildfires, as reported by our insurance-linked securities (ILS) focused sister publication, Artemis.
The cause of the fires remains unknown but investigators are now looking into what started the blazes which have killed at least 25 people and destroyed thousands of homes.
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