What next? Moody's looks into the impact of the Los Angeles wildfires

Insurers will undoubtedly reassess their position in the city

What next? Moody's looks into the impact of the Los Angeles wildfires

Catastrophe & Flood

By Josh Recamara

The Palisades and Eaton wildfires in Los Angeles are nearly fully contained as of January 28, according to the California Department of Forestry and Fire Protection. The wildfires have led to significant loss of life, extensive property damage and large-scale evacuations, according to a Moody’s report.

Risk modelers have estimated insured losses, including losses to the California FAIR Plan, of between $20 billion and $45 billion. A significant portion of these losses is expected to stem from homeowners’ coverage. The insured losses from the Palisades and Eaton wildfires are expected to be the highest in California’s history.

Wildfire losses are likely to have a major impact on the insurance industry’s first-quarter earnings. The majority of insured losses will be shared among standard and E&S homeowners insurers, the California FAIR Plan, and commercial property insurers, with smaller losses for fine art, collectibles and auto insurers. The distribution of losses will depend on insurers’ market shares in the affected regions.

Reinsurers will also 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. Most reinsurance contracts will also cover assessments on insurers imposed by the California FAIR Plan.

Based on initial estimates, the reinsurance sector is expected to cover at least 30% of the total insured losses. Reinsurers are expected to reassess their risk evaluations, pricing and terms for wildfire risk, Moody’s said.

Moody’s also noted what would happen if the FAIR Plan exceeds its resources. According to the note, when losses surpass the FAIR Plan’s resources, California insurers are required to contribute to the FAIR Plan’s losses through assessments based on their market share. These assessments may be recouped through policy fees.

Following wildfires, the California Department of Insurance (DOI) typically enforces a one-year ban on non-renewals in the affected areas. The availability of standard homeowners’ insurance has been limited in recent years, particularly in high-risk regions. Without further regulatory intervention, the wildfires will likely make it more difficult and costly for homeowners and businesses in high- and medium-risk areas to obtain standard coverage.

As with other natural disasters, insurers, reinsurers, and risk modeling firms will review claims data and adjust models. The industry’s assessment of wildfire risk is expected to rise significantly.

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