Insurers brace for up to $10bn losses from California wildfires

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Insurers are bracing for losses of up to $10 billion from Los Angeles wildfires after the blazes swept through some of California’s most exclusive neighborhoods, according to preliminary estimates from analysts.

Credit rating agency Moody’s said it “expects insurance losses to reach billions of dollars given the high value of homes and businesses in the affected areas,” while its competitor Morningstar DBRS said preliminary estimates indicate total insured losses at more than $8 billion.

JPMorgan analysts said in a “very preliminary estimate to help investors gauge the potential impact” that they believe insured losses “could approach $10 billion” based on an assessment of the affected area.

Specialty insurers focusing on the most expensive homes faced higher payouts, and Allstate, Travelers and Chubb were among the most exposed carriers in the state, JPMorgan said in its note to clients. Chubb focuses specifically on high-value properties.

More than 100,000 residents were ordered to evacuate, while fire officials said about 13,000 buildings were at risk.

Allstate and State Farm are among the insurers that recently stopped selling new home insurance policies in the state, blaming regulatory caps for rising rates that have made covering losses increasingly difficult. Insurance companies have also been dropping customers in areas most at risk.

Last year, State Farm Announce Insurance policies for 72,000 homes and apartments in the state will not be renewed, including 69 percent of insurance plans in the upscale Pacific Palisades area ravaged by recent wildfires.

This has led many homeowners to turn to the Fair Plan backed by the state of California, as well as less regulated home insurance policies, which insurers call “nonadmissible.”

The Fair Plan, which at the end of September had been exposed to less than $6 billion by wildfires in the Pacific Palisades region alone, provides coverage of up to $3 million for the property.

Insurers and analysts said the damages could rival those from the most devastating fires in recent years, including the 2018 Camp Fire in Butte County, California, which led to $10 billion in insured losses.

Climate change has intensified wildfire seasons in California. New development extending into fire-prone and prairie areas surrounding major cities has also increased insurance losses, along with rising home values.

Morningstar DBRS said the fires “reinforce the need for adequate home insurance rate increases in California” as well as prevention and mitigation initiatives.

But the rating agency noted that affordability of property insurance in California “will likely remain a challenge… with many property owners choosing to remain uninsured or underinsured due to high costs.”

The costs of real estate catastrophe reinsurance, or insurance for insurers, have also risen sharply.

JPMorgan said RenaissanceRe and ArchCapital were among reinsurers exposed to wildfires, but analysts at the bank expected their losses to be lower than those of similar events before 2023.

That year, many reinsurers raised the minimums at which insurance policies begin to provide coverage for losses, making primary insurers more vulnerable than reinsurers.