In a new report, Fitch Ratings has confirmed that even though the Los Angeles wildfires will cause insured losses considerably higher than past events, they are not likely to affect ratings of property and casualty (P&C) insurers and reinsurers.
The ratings agency expects insured losses to remain within ratings sensitivities for affected issuers due to ample capital levels, diversified risk exposure, and insurers’ ability to increase premium rates.
Since the fires are not fully contained, the estimation of insured losses is still ongoing, but industry analysts and observers have estimated the insured losses range to be between $10 and $30 billion, with economic losses currently ranging between $150 billion to $275 billion.
Fitch explained, “Expected losses for rated re/insurers, while not affecting capital, will reduce near-term earnings, depending on exposure to claims from homeowners, auto, commercial property, and business interruption insurance. Companies most susceptible to negative rating actions are those where wildfire losses exceed earnings and reinsurance limits, weakening capital relative to rating sensitivities.”
The losses could, however, pressure weaker capitalized companies, and also increase reinsurance costs and further strain a system that has seen insurers retreat from the market, warns Fitch.
Over the past few years, many insurers have stopped writing new business in California after reevaluating wildfire risk, pricing, and reinsurance market conditions. Many insurers have also reduced policies in the market due to higher losses and regulatory pricing restrictions.
Even after growing insured losses from wildfires in places like California, the risk is viewed as a secondary peril compared to typically more costly hurricane and earthquake-insured losses. Notably, the wildfire seasons of 2017 and 2018 ,which included the Tubbs and the Campfires, led to insured losses of $11.1 billion and $12.5 billion, respectively, as per re/insurance broker Aon.
“The largest California homeowners’ writers will bear significant losses from these events. The location of the fires within higher valued property neighborhoods will exacerbate losses for insurers focused on the high net worth (HNW) market and excess and surplus (E&S) lines carriers due to more specialized underwriting and valuation requirements,” says Fitch.
Fitch further discloses that substantial losses will also be incurred by California’s insurer of last resort, The Fair Access to Insurance Requirements (FAIR) Plan. FAIR Plan’s policy count increased by 35% in the 12 months ending September 30th, 2024, to over 450,000 after insurers retreated from the market.
California operating insurers contribute to the FAIR Plan based on market share, spreading the risk of high-loss events.
“Large catastrophic losses can strain the financial resources of the FAIR Plan, potentially leading to assessments or surcharges on participating insurers to cover deficits. Significant losses can lead to increased premiums or reduced coverage availability in the private market as insurers adjust to offset their increased liabilities from FAIR Plan contributions,” Fitch explains.
Attrition is the long-term goal of the FAIR Plan. The coverage is capped at $3 million per policy, making it inadequate to cover replacement costs. Reduction of FAIR market share will only be successful if private insurers are not restricted from adequately pricing for wildfire risk, notes Fitch.
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