In its latest report, Howden Re outlined financial risks associated with the growing frequency of wildfires and calls for regulatory reforms and investments in risk mitigation to stabilize the state’s insurance market.
With the increasing insurance protection gap in California, the report details the challenges facing the market, where a series of catastrophic wildfires, combined with regulatory constraints on risk-based pricing, have led to the withdrawal of several major insurers.
Howden Re said that this situation has left homeowners and businesses with limited or no coverage options, increasing financial vulnerability across the state. The number of uninsured or underinsured properties has risen in recent years, particularly following the latest carrier withdrawals.
Estimated insured losses from recent wildfires range from US$20 billion to US$45 billion, but a growing portion of economic damages remains uncovered. This has placed additional financial strain on property owners and state resources.
On-the-hook reinsurers are also expected to experience claims from primary companies under various reinsurance coverages, including quota-share treaties, excess-of-loss property catastrophe coverages, as well as facultative and per-risk reinsurance.
California’s regulatory restrictions on risk-based pricing have made it difficult for insurers to maintain profitability in wildfire-prone areas, leading to policy cancellations, reduced underwriting capacity, and greater reliance on the state’s insurer of last resort, the FAIR Plan.
The California homeowners’ insurance market has recorded a US$10 billion underwriting loss over the past decade, largely due to pricing limitations. The FAIR Plan, which provides up to US$3 million in residential coverage and US$20 million for commercial properties, has struggled to meet the needs of high-value properties affected by wildfires.
Howden Re noted that while the plan now covers more policyholders than ever before, its resources remain inadequate to absorb increasing wildfire losses.
Market disruptions have also affected home sales, with the California Association of Realtors reporting that nearly 7% of transactions in 2023 fell through due to rising insurance costs.
In the same year, the admitted market lost approximately 200,000 residential policyholders, even as regulators imposed moratoriums on policy cancellations and non-renewals.
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