Reinsurance capital to assume at the very least 30% of total insured losses from LA wildfires: Moody’s

Based on preliminary insured loss estimates, the reinsurance sector and its capital providers are expected to assume at the very least 30% of total insured losses from the Palisades and Eaton wildfires in Los Angeles, in accordance with analysts at Moody’s.

As we’ve been reporting, official reports state that over 17,000 structures have been damaged or destroyed by the wildfires, and the primary estimates of insurance industry losses from catastrophe risk modellers, up to now have a mid-point of $31.125 billion.

The best estimate up to now comes from CoreLogic at $35 billion to $45 billion, while Moody’s RMS projects that losses will range between $20 billion to $30 billion.

Verisk estimated that insured losses from the wildfires might be between $28 billion and $35 billion, while Karen Clark & Company (KCC) recently said that the hit to the industry will sit near $28 billion.

In a recent report, Moody’s revealed that losses might be broadly distributed among the many global reinsurance sector, noting that firms with exposure to homeowners insurers with high concentrations of business in California, and the California FAIR plan, could potentially see larger losses relative to the peer average.

“Given the numerous increase within the attachment points of most property catastrophe reinsurance coverages since 2023, we expect primary insurers will retain more of the losses than they might have numerous years ago. Based on preliminary insured loss estimates, we expect the reinsurance sector to assume at the very least 30% of total insured losses,” Moody’s commented.

It’s essential to notice that earlier forecasts from equity analysts had suggested that 10% to fifteen% of the general industry loss would fall to reinsurance capital, but now Moody’s estimates that at the very least 30% will flow to reinsurance arrangements.

That also means a bigger share is prone to flow through quota share structures, and thru certain retrocession arrangements too.

“Reinsurers will see claims from primary corporations under quite a lot of reinsurance coverages, including quota-share treaties and excess of loss property catastrophe coverages, in addition to facultative and per-risk reinsurance, that are utilized by primary insurers to limit exposures on individual properties,” Moody’s added.

“Moreover, most reinsurance contracts also cover assessments on insurers imposed by the California FAIR plan. Some catastrophe bonds are exposed to losses from wildfires and will see claims rise to levels triggering payments.”

Quite a lot of catastrophe bonds have recently seen further negative secondary market price movements because of potential exposure to aggregate attachment erosion, or actual losses, from the wildfires.

In line with our recent article on the cat bond price movements seen, the implied write-down, in mark-to-market terms from the wildfires, currently stands at around $200 million. Which shows that the cat bond market could only shoulder a small proportion of the losses that flow to reinsurance capital.

Moreover, Moody’s explained that the impact on reinsurance pricing from the wildfires “is difficult to find out at this point.”

“We predict the wildfires are prone to provide some support to property catastrophe pricing in the course of the mid-year reinsurance renewal periods, because the wildfire losses could erode significant portions of annual catastrophe budgets prior to the 2025 Atlantic hurricane season.

“We also expect wildfire-exposed accounts to see significant scrutiny upon renewal as reinsurers recalibrate their risk assessment and appetites, pricing levels, and terms and conditions.”

Importantly, Moody’s also addressed what would occur if losses from the wildfires were to exceed the California FAIR Plan’s resources.

“When losses exceed the FAIR Plan’s resources, California insurers are required to take part in FAIR plan losses through assessments which are determined in proportion to their market shares from two years ago for admitted business. For the primary $1 billion in total personal lines and $1 billion in industrial lines assessments, insurers can recoup half their share of the assessments through fees billed to policyholders,” the firm added.

Read all of our coverage related to the Los Angeles, California wildfires here.

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