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

Specialist manager of catastrophe bond and insurance-linked securities (ILS) funds Plenum Investments has said that it does not believe that the ongoing wildfire situation in Los Angeles will have a meaningful impact on the catastrophe bond market.

Plenum Investments commented in an update to its investors that currently a “marginal” impact on the cat bond market is possible from these California wildfires.

The investment manager said, “As the fires continue to spread uncontrollably, there is currently no clarity about the extent of the damage. However, there is a high potential for damage to the insurance industry.

“The Palisades Fire in particular is raging in the Santa Monica and Malibu area, with some of the most expensive real estate in California and a median building value of over $2 million. The loss potential for the fires is estimated by some analysts to be between $6 and $13 billion, with overall economic loss potentially reaching $50 billion or more.

“However, even though some CAT bonds, which cover multiple perils across the USA, do include wildfire, it is unlikely that the current Los Angeles wildfires will have a meaningful impact on those bonds, since wildfire contributes only marginally to the risk of those bonds.

“To assess the risk of these bonds being triggered, we can look back to the 2018 Woolsey wildfire, which burned 97,000 acres (392 km2) in the Malibu area, an area about five times larger than the current Palisades Fire. This event would not have resulted in a default of these CAT Bonds.”

We detailed some sponsors of multi-peril catastrophe bonds that cover the wildfire peril in our latest article on these fires.

That article also noted that one analyst firm, J.P. Morgan, has now doubled its earlier insured loss estimate for the wildfires, to as much as $20 billion.

But there remains considerably uncertainty and it may be some time before more accurate modelled loss estimates are available. Although clearly the insured loss costs of this developing catastrophe may be relatively significant for the broader insurance and reinsurance industry.

Also read:

– 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.