California wildfires earnings event for re/insurers: S&P

S&P Global Ratings expects the insured losses from wildfires in northern and southern California to be contained as an earnings event and for the reinsurance sector to be able to absorb the impact from these fires as well as recent hurricanes although catastrophe budgets will be strained.

The Camp Fire started on Nov. 8 burning 150,000 acres and is 65 percent contained, according to latest information form the California Department of Forestry and Fire Protection (Cal Fire). The wildfire has destroyed 10,364 residences, 418 commercial and 2,992 other buildings, according to Cal Fire.

The Woolsey Fire also started on Nov. 8 burning 96,949 acres and is 91 percent contained as of Nov. 18. So far, 1,452 structures have been destroyed and 337 have been damaged, according to Cal Fire.

On the primary insurance side, the risk from these events is spread across the industry, but AIG, Chubb, and Farmers have the largest exposures, the agency commented. Although AIG and Chubb will likely experience greater losses from the southern California wildfires given the high-net-worth nature of the markets that have been hit, S&P believes these losses will be contained.

Farmers could be an outlier given its capital constraints and large exposure, despite its improved results to-date and comprehensive reinsurance program. However, these concerns are already incorporated in the agency’s negative outlook on Farmers.

For the reinsurance industry, these losses are adding to already significant losses from other natural catastrophes, although potentially at a lower level than what was experienced in 2017. Still, these events may further the continued down pricing cycle for the industry as it again finds it difficult to raise rates.

Although California remains integral given its sheer size and economic diversity, insurance pricing has been a thorny issue as insurers are challenged by a strict regulatory environment that limits their ability to raise rates, including for weather-related exposure, S&P said.

The mounting bills from such events against this regulatory backdrop may lead to some soul searching as private insurers consider how much coverage to write in this state.

"Given their increased frequency and the lasting effects they leave on the communities' impacted, weather-related events and catastrophes are a bit sobering for the insurance industry as they underscore the challenges for modelling and covering these risks," noted S&P Global Ratings credit analyst Stephen Guijarro.

"Naturally, there is a great deal of unpredictability that requires vigilant risk management. Fortunately, the industry's strong capital level may limit its impact to an earnings event and allows it to potentially keep writing this business."

S&P expects that the wildfire events insured losses to be lower than the major 2017 fires in northern California.

The historic 2017 wildfires in the US led to nearly $16 billion in insurance payments; almost entirely from the October and December events in California.

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