Losses from Californian wildfires reach $3-6bn: Moody’s

P&C insurers face large claims from devastating California wildfires as losses are estimated to have reached between $3 and $6 billion, according to Moody’s.

On 8 November, three significant wildfires began in California. By Monday, the largest, the Camp Fire in Northern California's Butte County, had resulted in the tragic loss of lives, destroyed about 6,453 homes and 260 commercial structures, burned about 111,000 acres, and continued to threaten 15,500 additional structures, according the California Department of Forestry and Fire Protection (CAL FIRE) and other authorities. The Woolsey and Hill fires in Ventura County of Southern California have also caused two deaths, destroyed 179 structures and burned about 90,000 acres. The fires continue to burn, with total insured losses in the billions of dollars, affecting California homeowners and commercial property insurers.

Based on past fires and the number of structures damaged, insured losses will run in billions of dollars, Moody’s said. Assuming CAL FIRE’s estimate of 6,892 structures destroyed between the three fires and a statewide average wildfire loss value of $981,000 per structure, losses could be around $6.8 billion so far, and the fires are still burning, the agency noted. However, the average claim size for the Camp Fire (the most destructive of the three fires) will likely be lower than statewide averages because home values in the affected area are relatively low.

Overall, Moody’s estimate of current insured losses is in the range of $3-$6 billion. Given already high construction demand from the 2017 and 2018 wildfires and a strong housing construction market, the spike in demand for construction labour and materials following the three wildfires will lead to higher insured losses.

California homeowners insurers are also likely to be adversely affected by additional living-expense claims given that around 300,000 residents have been forced from their homes because of the three fires. Additional living expenses are typically capped at 30 percent of a dwelling’s value and are paid only if the property is damaged or if the property has been subject to mandatory evacuation. Some commercial property insurers are also likely to pay business-interruption claims, Moody’s said.

California property and casualty insurers may also be hit by wildfire losses from properties insured by the California Fair Access to Insurance Requirements (FAIR) Plan, which insures a disproportionate share of property in remote locations and regions with high wildfire exposure. CAL FIRE has previously identified Paradise, a town in Butte County which is suffering the bulk of the Camp Fire losses, as a Very High Fire Hazard Severity Zone (VHFHSZ). Each California insurer is required to participate in FAIR plan losses in direct proportion to its market share.

According to CAL FIRE, California wildfires burnt a total of 621,743 acres through November 4, up from 505,956 acres in full-year 2017, which was a record loss, Moody’s said.

Several recent academic studies have concluded that wildfire exposure for the western US has increased in recent years because of drier forests, a longer burning season, and higher average temperatures.

California homeowners and commercial property insurers will likely continue to reassess their exposures, pricing and reinsurance arrangements with regard to wildfires, Moody’s noted.

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