Re/insurers struggling with California wildfire risk despite rate hikes: S&P

The market for re/insuring California wildfire risk remain in disarray with no consensus on what constitutes adequate rates and little comfort with the risk despite substantial updates to wildfire risk models.

That is according to a new report by S&P Global Ratings called ‘Jolted By California Wildfires, Re/Insurers Recalibrate Their Risk Appetite’.

The California wildfires of 2017-2018, with insured losses of about $33 billion, surprised re/insurers as the losses were outside of the market understanding of the risk, and they affected both property and casualty business lines.

However, the wildfires, in conjunction with other catastrophe losses, had limited impact on the creditworthiness of re/insurers.

In the new report, S&P Global Ratings said that there is no consensus among re/insurers on the price adequacy despite significant rate increases thus far, or comfort with the risk in spite of substantial updates to wildfire risk models.

The reinsurance pricing for California wildfires could be up 30 percent to 70 percent heading into the 2020 renewals; capacity will continue to be constrained as this market remains in disarray, which will fuel further rate increases.

"The past two years have clearly highlighted that these secondary risks are not to be taken lightly," said S&P Global Ratings credit analyst Hardeep Manku. “Indeed, reinsurers have reassessed their risk appetites in view of recent experiences. Considering the limitations of the wildfire catastrophe models, if re/insurers were to underestimate this risk, they may end up taking outsize exposures that could result in a capital event and ultimately hurt their credit worthiness.”

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