Wildfires are intensifying the problems in California’s property insurance market, according to a new commentary from AM Best.
Those problems include a major insurer pullback from California in the past year, followed by the L.A. wildfires, which could result in total losses of up to $164 million and insured losses of up to $40 billion. Allstate Corp. on Wednesday became the fourth carrier to report losses in excess of $1 billion from the fires. CEO Tom Wilson in a fourth quarter earnings call said pretax losses from the L.A. wildfires are expected to be about $1.1 billion net of reinsurance.
The AM Best commentary, “California Wildfires: Multiple Credit Negative Impacts for Insurers,” asserts that given the increased losses in recent years from more frequent severe wildfire events that prompted several insurers in the state draw back from writing coverage, homeowners in California have increasingly turned to the FAIR Plan and non-admitted market.
“Although comparatively modest, the percentage of homeowners’ insurance premium written by surplus lines insurers has increased by nearly 10 times over the last decade with premium surpassing the $2 billion mark for the first time in 2023,” David Blades, AM Best’s associate director, industry research and analytics, stated in the commentary. “This activity reflects a substantial amount of premium leaving the admitted market and finding coverage in the non-admitted market.”
Based on FAIR Plan data for fiscal years ending Sept. 30, this dynamic has led to a 276% increase in policies in the plan from 2018 through 2024. The underwriting performance of the FAIR Plan and the insurers supporting it was unfavorable from 2018 through 2021, predominantly from wildfires, according to AM Best.
The losses are likely to lead to more costly reinsurance for the FAIR PLAN, while catastrophe bonds have seen negative secondary market price movement due to exposure to the wildfires. Wildfire losses have driven bond prices down by 10% to 20% on average, the commentary states.
RenaissanceRe said last week it expects to incur about $750 million in losses from the wildfires, and it anticipates that industrywide impacts should halt the drop in property-catastrophe reinsurance prices.
Insured and total losses from the January wildfires continues to rise in the weeks following the blazes, which erupted overnight and were fanned by hurricane-force winds, filling the Southern California area with smoke and destroying thousands of properties.
Preliminary data show insuers have paid out more than $4 billion for losses from the biggest two of the Los Angeles-area wildfires that swept through the region and destroyed tens of thousands of homes earlier this month.
Claims figures from insurers released by the California Department of Insurance on Jan. 30 show that 31,210 claims have been filed for home, business, living expenses and other disaster-related needs. According to CDI, $4.2 billion in claims have been paid.
The FAIR Plan, the state’s insurer of last resort, reported it has received more than 3,200 claims as of Jan. 28 for damage caused by the Pacific Palisades Fire and more than 1,200 claims for damage caused by the Eaton Fire.
The fires come after a year in which carriers began requesting rate hikes and they began pulling back from the wildfire-prone state. CalFire data show that seven of the state’s 10 most destructive wildfires have occurred in the last 10 years.
In response, California Insurance Commissioner Ricardo Lara introduced his so-called Sustainable Insurance Strategy to increase coverage in wildfire-distressed areas of the state. Lara in December announced a catastrophe modeling and ratemaking regulation that will allow carriers to use the models as a factor in setting and getting rates.
The changes to the regulations were well received by the insurance industry, but they may do little to immediately sooth the impact from the L.A. fires, which are expected to cause property insurance carriers to raise rates, reduce coverage options, or both, in California and other at-risk areas, according to S&P.
Preliminary estimates from Moody’s RMS are for insured property losses to be as much as $30 billion from the fires. Catastrophe modeler KCC said insured loss from privately insured and California FAIR plan policies to residential, commercial and industrial properties, and autos from the Palisades and Eaton Fires will be close to $28 billion.
Estimates issued by Verisk peg insured losses to property from the Palisades and Eaton fires between $28 billion and $35 billion, which includes losses to the California FAIR Plan.
The highest figures issued on insured losses so far include a high of $40 billion put out last week from Keefe Bruyette & Woods analysts. CoreLogic indicated a $35 to $45 billion range of insured losses for two major fires in Los Angeles.
Top photo: 2025 Eaton Fire in Los Angeles. Source: CalFire.
Topics
Catastrophe
Natural Disasters
California
Wildfire
AM Best
Property
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