Re/Insurer Losses from LA Wildfires Expected to Be Manageable.
Insurers are encountering considerable financial setbacks due to the devastating wildfires in Los Angeles, particularly because of the substantial worth of properties and enterprises within the impacted areas. Nevertheless, these losses are expected to be within manageable limits for both insurers and their reinsurers, with initial assessments indicating a range between $10 billion and $15 billion, as reported by S&P Global Ratings, referencing information from external sources.
“Significant wildfire losses in the first two weeks of 2025 could rapidly deplete the catastrophe budgets of U.S. primary insurers. This early strain may lead to earnings pressure later in the year, especially if 2025 proves to be above-average for catastrophes,” S&P said in its report, titled “Insurers Can Absorb Losses Amid Escalating Los Angeles Wildfires.”
“Although expected losses are steep, we believe many of our rated insurers have the capital resilience to absorb them, after strong results in the first nine months of 2024 (and likely for the year),” S&P continued. “Moreover, many major primary insurers in the admitted market, such as State Farm Mutual, Automobile Insurance Co., Allstate Corp., and Hartford Financial Services Group Inc., have either reduced exposure to or exited the California homeowners insurance market over the past two years.”
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In its analysis of the wildfires in Los Angeles, Moody’s Ratings indicated that following the significant wildfires of 2017-2018, numerous homeowners' insurance providers in California chose not to renew their policies. “particularly in wildland-urban interface (WUI) regions, while enhancing underwriting standards, conducting inspections, requiring homeowners to take steps to reduce wildfire risk and reducing geographic clustering.”
S&P does not expect the LA wildfires to trigger rating changes.
Hartford subsequently issued a comment about the S&P report: “California is and continues to be an important market to The Hartford. We stopped offering new homeowners’, renters’ and condo policies on Feb. 1, 2024, in consideration, and after analysis, of the unique challenges and dynamics at play in the state. We need to be able to price our homeowners,’ renters and condo insurance appropriately for the risks we are protecting against. Lastly, we continue to write all our other existing products in California, such as business insurance and personal auto, and will continue to renew existing homeowners’, renters’ and condo policies consistent with our underwriting guidelines.”
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S&P indicated that the $3.6 billion recorded in California's excess and surplus (E&S) property market is relatively modest for the nonadmitted sector. The agency noted that these E&S specialty insurers are typically well-diversified and possess the ability to promptly increase premiums to recover from losses. Moody’s observed that it may take several weeks or even months to assess the full extent of the insured damages; however, the wildfires in Los Angeles are anticipated to rank among the most expensive in the state's history. J.P. Morgan has revised its estimate of insured losses to exceed $20 billion, while Wells Fargo shares a similar outlook, projecting that total economic costs could surpass $60 billion, according to reports from Reuters.
“Already the most destructive wildfire event in Los Angeles County history, certainly now in the top three deadliest fires in the state, and potentially the costliest in U.S. history, it is hard to keep up with the latest extent of the destruction from now six separate wildfires,” according to Firas Saleh, director-North American Wildfire Models, Moody’s.
Reinsurance Impact
At the same time, S&P said the impact on its rated global reinsurers will also be manageable “with no significant effect on earnings due to the event’s magnitude and timing.”
The wildfire marks the initial significant natural disaster loss for the sector this year, and it is anticipated that the losses will remain within the natural catastrophe budgets of reinsurers for the first quarter of 2025, according to S&P. “However, it is still unclear how aggregate reinsurance coverage could be affected, given this will depend on developments over the remainder of the year.”
Reinsurers are approaching 2025 with solid capitalization, bolstered by substantial earnings in 2023 and 2024, which, according to S&P, enabled the industry's returns to surpass its cost of capital.
“The reinsurance sector remains disciplined regarding its appetite for frequency losses, maintaining high attachment points for coverage,” the ratings agency said, noting that, despite selective price decreases during the January renewals, the sector remained committed to defending terms and conditions and those higher attachments.
There’s no question that this event will impact reinsurers – but at a manageable level, commented economist Robert Hartwig, a clinical associate professor of finance and insurance at the University of South Carolina, and head of the university’s Risk and Uncertainty Management Center, in an interview.
This wildfire event is highly concentrated, geographically, and is highly concentrated in terms of the timeframe, which is “precisely what reinsurance is designed for,” he said. “So it’s the type of event that’s likely to penetrate into reinsurance – even with higher retentions – although not as much as in the past when retentions were lower.”
Hartwig observed that an event of this scale will have a more significant impact on reinsurers than a cumulative series of severe convective storm events occurring over an entire summer, despite both scenarios resulting in equivalent financial losses. “And in each one of those cases, the impact on reinsurers would’ve been mitigated by the higher attachments.”
While the LA wildfires have caused significant insured losses, estimated between $10B-$15B, the financial impact on insurers and reinsurers is expected to be manageable. Strong capitalization and high attachment points will help the industry absorb the losses, though the full extent of damages will take weeks or months to assess.
