California Wildfires as of 15th January 2025

The California wildfires continue to threaten large parts of Los Angeles (LA) with thousands of structures reported to be destroyed, being mostly private homes, and 25 deaths have been confirmed. The largest blaze has consumed more than 24,000 acres of land in the Pacific Palisades neighbourhood alone. The strong Santa Ana winds, which fuelled the fires last week, dissipated over the weekend but are picking up again this week, increasing the risk of further damage.

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These LA wildfires have caused extensive destruction, with new estimates of the economic loss as high as $275bn, but insured losses are likely to be far lower. According to various broker reports and underwriter comments in recent days, insured losses could be in the range $20bn – $30bn. The protection gap is believed to be significant as it is extremely difficult for homeowners in high-risk areas to obtain or afford insurance against wildfire. State Farm and Farmers Insurance Group are believed to be the largest writers of private homeowners in California, which together write around a third of the premium income, albeit that both carriers are reported to have reduced their exposure to California homeowners’ business in recent years. Many homeowners in wildfire-prone areas either do not purchase insurance or join the California Fair Access to Insurance Requirements (FAIR) Plan, which the state created as a last resort for homeowners who could not find insurance. Many people purchase this coverage to satisfy their mortgage requirements, but the policies only cover basic property damage and carry a $3m limit. Given the value of the real estate involved and the limited coverage, FAIR Plan policyholders may only recover a proportion of their actual loss. The exposure of FAIR policies has more than doubled between 2020 and 2024, as other commercial insurers were less willing to offer coverage. This scheme has reinsurance protection, some of which is written into Lloyd’s. Whilst some commercial property has also been destroyed, this is believed to be a small proportion of the whole.

Lloyd’s is unlikely to have much direct insurance exposure to these losses, other than through some specialist high value homes property binders. Our underwriters have made significant advancements in wildfire data analytics, enhancing their ability to assess and manage wildfire exposures. We will have exposure to these fires on the reinsurance side, depending on the final quantum of the insured losses.

The insured loss forecast range of $20bn – $30bn puts the cost of these fires now above those from the California wildfires of 2018 which saw a combined insured loss of $18bn, according to Munich Re. These losses equated to a loss of £700m for Lloyd’s at the time. As these wildfires are still burning, it is too early to ascertain a total loss number for the Lloyd’s market.  Early conversations with our syndicates suggest that those with a large US catastrophe reinsurance account are likely to put up a sizeable reserve for these wildfires but other syndicates will have little or no exposure. We believe that the majority of the costs of these wildfires will attach to our syndicates’ 2024 year of account. Our 2024 portfolio suffered a small loss from the Baltimore Bridge collision and larger losses from Hurricanes Helene and Milton but otherwise, this well-rated year has seen a relatively low level of attritional losses. Typically one might expect Lloyd’s to have up to a 10% share of the total insured loss. If this was the case, an insured loss of up to $3bn would represent c5% of premium written and, therefore, we still believe the 2024 year of account remains capable of producing a good profit for our portfolio. With a loss like this falling so early in 2025, it is likely to help to tighten the market for the remainder of the year.