California wildfires update

We have previously reported on the potential insurance impact of the California wildfires which started on 7^th January near the city of Los Angeles (LA). Heavy rains in previous years created dense vegetation, but an exceptionally dry second half of 2024 left it dangerously flammable so these wildfires, fanned by wind speeds of up to 100mph, caused significant devastation. 29 people are confirmed to have died from the fires and, at one stage, some 200,000 residents were evacuated from LA. The most devastating fire known as the ‘Palisades Fire’ burnt an estimated 23,448 acres, in a region which is renowned for having a significant number of high value homes. LA firefighters have confirmed that the largest two fires ‘Palisades’ and ‘Eaton’ are now contained.

Alpha comment

The wildfires in LA have caused a significant amount of destruction and (re)insurers are currently assessing their potential losses. The industry modelling firms have issued various insured loss forecasts, which seem to sit within the range $30bn-$50bn. Around 80% of losses are expected to be from personal lines (household and private motor) business with the remainder from the commercial sector. As a result, the exposure to Lloyd’s is expected to come from specialist property binders, cargo/fine art and most significantly property reinsurance. California is a state where a number of national US insurers have had to undergo remediation due to poor performance. This has also been the case for reinsurers where deductibles and prices have increased dramatically in recent years.

The state of California does have an insurer of last resort called FAIR Plan and this provides some insurance to high-risk homes and business that normal insurers will not cover. Lloyd’s syndicates provide reinsurance to FAIR Plan and other US insurers and currently conversations are ongoing as to whether the wildfires should be considered one event or two which could materially impact the overall loss to reinsurers. Historically, however, Lloyd’s exposure to these reinsurance programmes has been relatively modest as compared to other reinsurance markets.

Therefore, despite the significant damage caused by these fires, we believe that the underwriting remediation undergone in recent years will help protect our syndicates to some extent. These wildfires are another reminder to underwriters of the growing frequency and severity of losses caused by what used to be called ‘secondary perils’. The fires could put the brakes on reinsurance rate reductions and could result in some rate increases for the remainder of 2025.

In our last report we advised that the majority of the loss would likely fall on to your 2024 year of account, which was otherwise promising to be another good year. We have not heard anything in the last two weeks which changes this view. We mentioned the fires could erode c5% of profit from the 2024 year of account, but the profit forecast could still be in double figures, depending on the run-off of the unexpired policies over the rest of this year.