According to analysts at Morningstar DBRS, the wildfires in the Los Angeles area have caused unprecedented property damage, with insured losses potentially surpassing $30 billion, leading to a negative but manageable impact on insurers’ credit profiles.
The analysts noted in a recent commentary that, with more than 12,000 structures destroyed, the LA area wildfires are expected to be the costliest in U.S. history, given the high property values in the affected neighbourhoods.
“Overall, the resulting economic damage could rank these fires among the most damaging natural disasters in U.S. history, including major hurricanes,” Morningstar DBRS said.
Specialist insurance and reinsurance broker BMS Group recently noted that while it is too early to provide a credible insured loss estimate for the LA wildfires, the total is likely to exceed $25 billion, while KBW has raised its insured loss scenario estimate range to a maximum of $40 billion.
As per Morningstar DBRS’s analysts, the impact on leading California property insurers is likely to be “significant but manageable” given the industry’s diversified risk exposures and its access to global reinsurance capacity.
However, Morningstar DBRS observed that the wildfires will worsen the ongoing crisis in the California property insurance market, which has already caused major insurers to stop issuing new policies while regulators attempt to address affordability and insurability issues.
At the same time, reinsurance costs are reportedly likely to be negatively affected, further challenging the ability of primary insurers to provide coverage.
The firm’s analysts emphasised that there is no quick fix for the issue of wildfires and home insurance, adding that authorities need to do more fire prevention work, while developers need to be more aware of wildfire risk when building properties next to natural areas.
They continued, “Insurers need to work with their customers to protect properties from fire damage, and homebuyers need to be aware of the high insurance costs when purchasing high-risk properties.
“With climate change having the potential to increase the frequency of catastrophic wildfires, a large effort will be required to adapt to evolving risk exposures and maintain a functioning insurance market.”
Morningstar DBRS emphasised that in the short term, insurance regulators must allow for risk-based pricing, as the departure of insurers from the market would be counterproductive.
Meanwhile, the rapid growth of coverage provided by the FAIR Plan is reportedly unsustainable, as the plan depends on a healthy state-wide property insurance market to operate, meaning premiums are likely to rise and affordability issues will persist, potentially affecting property values and leaving some homeowners without insurance.
The firm’s analysts concluded, “Given the size of the California insurance market, insurers and reinsurers have a significant interest in restoring a healthy pricing environment and addressing the availability of home insurance. Pooling high-risk properties will only work if the broader insurance market is economical for regular homeowners, insurers, and reinsurers.
“While reinsurance capacity is key for direct insurers to be able to provide widespread coverage, it does not address the insurability of homes adjacent to wildlands.
“As wildfires become a more frequent occurrence, capacity may be available to provide the coverage, including through multiple-peril alternative reinsurance capital instruments, but pricing is likely to remain a sticking point.”
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