Reinsurers' earnings to fall on California wildfire losses

Editor’s note: The number of fatalities from California’s Camp Fire totaled 79 as of 7:28 a.m. local time Tuesday, November 20, 2018, according to the Cal Fire firefighting agency. Cal Fire also reported the blaze has destroyed 12,637 residences, 483 commercial and 3,718 other buildings. For more information, see Cal Fire Incident Information.

The ongoing California wildfires are expected to become one of the costliest wildfire catastrophe-insured loss events ever for the property & casualty insurance industry.

Losses will likely negatively impact fourth-quarter earnings of companies with material property exposure in the state, Fitch Ratings says.

Losses within anticipated levels

However, while insured losses are certain to be significant, they are expected to remain within the level of losses that the insurance industry anticipates when pricing catastrophe risk into premiums. Furthermore, the insurance companies affected by the wildfires are generally the larger, national carriers that, as a group, have large capital bases and high insurer financial strength ratings.

Related: The new reality of North America wildfire

Fitch does not expect a major deterioration in financial strength if these companies incur losses roughly in proportion to their market shares. Also, given the high catastrophe-prone risk and generally higher value of homes in these areas, a sizable portion of the coverage is provided by the Excess and Surplus (E&S) market, and may work to shift losses away from traditional large admitted insurers.

The Camp Fire is already the most destructive fire in the history of California, with almost 12,000 structures destroyed as of Nov. 19, according to Cal Fire. At the same time, the Woolsey Fire, which is nearly contained in Southern California, is in an area with significant residential property values.

Reconstruction costs & insured losses estimates

According to an analysis by CoreLogic, Inc., over 48,000 homes, with a total reconstruction cost of more than $18 billion, were at ‘high’ or ‘extreme’ risk of wildfire damage from the Camp and Woolsey Fires. Catastrophe risk modeler Risk Management Solutions (RMS) noted that insured losses from the Camp and Woolsey fires could reach between $9 billion and $13 billion.

The fires reflect a second consecutive year of major wildfire losses in California as the industry incurred $11.5 billion of insured losses in 2017, according to Munich Re. The state also experienced wildfires in July of 2018 that generated $845 million of direct-insured losses.

Fitch estimates that each $1 billion of insured loss adds about 17 bps to the industry’s 2018 loss ratio based on Fitch’s almost $600 billion 2018 net earned premium forecast. Each $1 billion of homeowner insured loss adds about 120 bps to the industry’s homeowner 2018 loss ratio. The U.S. industry all lines loss ratio and homeowners’ loss ratio in 2017 were approximately 76% and 79%, respectively.

Exposure to reinsurance industry

Losses are anticipated to be borne largely by primary insurers. Exposure to the reinsurance industry will most likely transpire through aggregate catastrophe treaties in which the current wildfires add losses from primary cedants that have reported losses from other catastrophe events throughout the year.

The insurance lines of business most affected by this catastrophe are personal lines, particularly homeowners, but also automobile. Commercial property and business interruption claims could also be significant.

Related: Reinsurance market slows