Alternative capital can provide wildfire capacity, but pricing a sticking point: Morningstar DBRS

With wildfires becoming a more recurring peril for the California property insurance market, alternative capital may be available to provide coverage, including through multiple-peril alternative reinsurance capital instruments, however “pricing is likely to remain a sticking point” according to analysts at Morningstar DBRS.

In a new report, Morningstar DBRS has revealed that the on-going wildfires in the Los Angeles area have caused unprecedented property damage, with insured losses potentially surpassing $30 billion, leading to a negative but manageable impact on insurers’ credit profiles.

Broking group BMS recently said that it expects the insurance and reinsurance market losses from the LA region of California wildfires will likely exceed $25 billion, while analysts at KBW have analysed what an industry loss of up to $40 billion might mean for the market.

As per Morningstar DBRS’ analysts, the impact of the wildfires on leading California property insurers is likely to be significant but manageable, given the industry’s diversified risk exposures and its access to global reinsurance capacity.

However, analysts also noted that the wildfires will worsen the ongoing crisis in the California property insurance market, which has already caused major insurers to stop issuing new policies across the state, while regulators attempt to address affordability and insurability issues.

Furthermore, reinsurance costs are likely to be negatively affected too, further challenging the ability of primary insurers to provide coverage.

It’s important to note that reinsurance capacity is critical for direct carriers to be able to assume and price wildfire risk, but analysts warned that this is expected to become more expensive following this event.

“Reinsurers have also been reluctant to assume California wildfire risk in recent years, with the 2018 Camp and Woolsey fires demonstrating the potential for significant losses to be concentrated in one season. After significant rate increases, more of the wildfire risk exposure is now being retained by direct carriers as their nation-wide diversification allows for wildfire capacity and reinsurance becomes uneconomical,” Morningstar DBRS added.

Moreover, given the size of the California insurance market, analysts suggest that both insurers and reinsurers have a “significant interest in restoring a healthy pricing environment and addressing the availability of home insurance.”

“While reinsurance capacity is key for direct insurers to be able to provide widespread coverage, it does not address the insurability of homes adjacent to wildlands,” Morningstar DBRS said.

Concluding, “As wildfires become a more frequent occurrence, capacity may be available to provide the coverage, including through multiple-peril alternative reinsurance capital instruments, but pricing is likely to remain a sticking point.”

It’s worth noting that ILS markets have pulled-back from wildfire risks in recent years, given concerns over the peril frequency, climate effects and that pricing may not be adequate in many cases. But, if terms and cost of capital deployment are commensurate with the exposures being assumed and adequate to derive a return over the long-term, then there is every chance more capacity can be brought into the market to cover this peril.

Also read:

– Stone Ridge marks mutual cat bond / ILS funds the most on LA wildfires.

– Euler ILS Partners puts wildfire industry loss at $15bn-$17bn, highlights BI / ALE uncertainty.

– Wildfire losses may cause re/insurance pricing to firm as payback sought: Berenberg.

– BMS says LA wildfire insured losses likely to exceed $25bn. KBW analyses up to $40bn.

– Autonomous raises its LA wildfire loss estimate to $25bn, $18bn from Palisades fire.

– California wildfires: Subrogation topic raised, as utilities come into focus.

– ICEYE satellite analysis: Over 10,900 buildings likely destroyed in Palisades and Eaton fires.

– Catastrophe bond price movements due to LA wildfire exposure.

– Evercore ISI: LA wildfire insured loss $20bn-$25bn. Could be one event under reinsurance.

– LA wildfire losses to “notably exceed” $10bn, could approach $20bn: Gallagher Re.

– Mercury says LA wildfire losses to exceed reinsurance retention.

– LA fires: “Considerable attachment erosion” likely for some aggregate cat bonds – Steiger, Icosa.

– LA wildfires: Over 10k structures destroyed. Insured losses up to ~$20bn, economic $150bn.

– LA wildfire losses unlikely to significantly affect cat bond market: Twelve Capital.

– LA wildfires unlikely to cause meaningful catastrophe bond impact: Plenum Investments.

– JP Morgan analysts double LA wildfire insurance loss estimate to ~$20bn.

– LA wildfires: Analysts put insured losses in $6bn – $13bn range. Economic loss said $52bn+.

– LA wildfires bring aggregate cat bond attachment erosion into focus: Icosa Investments.