California Wildfires: Losses Expected To Reach Record Levels

In a recent report, titled California Wildfires Losses Projected To Reach Record Levels, A.M. Best said that 2018 losses from California's latest round of wildfire activity will be at record levels.

The number of acres burned in 2018 is already nearly double the 2017 total, at the time of the report. Three different fires erupted in California on November 8: two in the south (Hill and Woolsey) and one in the north (Camp). Per the report, the Hill and Woolsey fires have claimed more than 95,000 acres and damaged or destroyed an estimated 376 structures, while the Camp fire alone is now considered the deadliest wildfire in the state's history.

A.M. Best said that the potential for historic losses was already likely before the Woolsey fire ripped through the wealthier area of Malibu, which has a median home value of approximately $2.9 million. Also at risk are many commercial structures and locations in the area that are used in the film and television industry. Many primary insurers limit their exposure to high-value properties and cede exposure outside of their tolerance to reinsurers, according to the report.

Despite a loss-affected 2017, most large writers in California are larger national companies that started 2018 with adequate risk-adjusted capital. The catastrophe events of 2018 will likely cause significant earnings volatility and could stress some balance sheets. Insurers have responded to a certain extent to the wildfires of 2017, but the lessons learned from the 2018 events will again call for reevaluation of their underwriting and risk management strategies. Additionally, the risk-scoring models insurers have been using to identify areas particularly exposed to wildfires and to better establish their risk appetite and tolerances will be severely tested, according to the report.

The wildfires in 2018 and 2017 demonstrate the essential role insurers play in the economy during catastrophes and underscore the need for prudence in capital and risk management. A.M. Best said it will provide updates as insurers and reinsurers are able to assess the situation and generate more detailed loss estimates once the fires become more contained.

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