Alex Gedge_Hylant Global Captive Solutions
23 January 2025Analysis

Editorial – Can captives ride to the rescue as disasters engulf us?

As Los Angeles grapples with the impact of the wildfires, can captives step in when conventional insurers can no longer cope? Captive International investigates.

January 2025 has been dominated by the devastating wildfires in Los Angeles. A persistent drought has dried the area out and when the first fires hit the seasonal Santa Ana high winds, a bad situation turned into a disaster.

Loss estimates are already coming out, even though the fires have not yet been completely extinguished.

Moody’s RMS Event Response estimates insured losses for the January firestorm events will likely range between $20 billion and $30 billion, while some other have gone as high as $40 billion.

According to one assessment of the damage by Stonybrook Capital, losses will largely fall on the homeowners line of business, with the state-backed FAIR plan taking a large share and distributing it across the admitted insurance industry, who can recoup much of these assessments through policy surcharges in later years.

Stonybrook also pointed out that private insurers have stopped writing new policies in wildfire areas or withdrawn from the market entirely due to regulatory constraints and rate suppression, resulting in a threefold growth in the FAIR Plan, since 2020.

It is this impact of the losses on the insurance companies that cover California that will have made many people nervous. Over the past decade California has regularly been hit by drought and wildfires – which is why many insurance companies have removed themselves from the State, citing high losses.

Captives.insure described the event as not just a localised crisis but a global wake-up call. In a statement, the company said the event is forcing the industry to reassess its approach to climate-related risks, potentially reshaping how insurers operate worldwide. 

The disaster may accelerate the trend of insurers limiting coverage in high-risk areas, not just in California, but globally. Moreover, California's new regulations allowing insurers to use forward-looking climate risk models for pricing could set a precedent, leading to higher rates in other states and countries facing similar climate-related risks.

The situation in California is particularly precarious, Captives.insure stressed, adding that the California FAIR Plan is teetering on the brink of insolvency, with losses estimated between $6 billion and $8 billion. This potential collapse could create a domino effect, leading to market instability and increased pressure on global insurers to plug the coverage gap.

Asked how the LA wildfires will impact the market, Alex Gedge (pictured), senior captive consultant at Hylant Global Captive Solutions in London, told Captive International that: “It’s already a difficult market, where insurers have withdrawn from offering coverage, so we would expect this trend to continue.

“In these situations where the risk profile has inherently changed (wildfire has increased in frequency and severity), we have seen fewer options of insurers, and then those who still offer it may ask for higher pricing, higher deductibles and lower limits. Typically, market trends are seen first through reinsurance markets, so we will see this higher level responding, and then insurers will follow suit.”

Gedge added that in some other situations where the insurance market shrinks so significantly, governments have stepped in (for example Pool Re in the UK terrorism market).  Although she said that the California FAIR plan is in place, she added the caveat that there will need to be coordinated efforts to find a solution for people and businesses who are impacted by wildfire.

 However, Gedge also said that captives can help this stressed market in the following ways:

• Step in where markets are not offering viable coverage (either through no, or limited, capacity, or if terms or pricing are not viable for the client).

• Access alternative markets, such as reinsurance, parametric, catastrophe bonds or ILS markets.

• Craft bespoke wordings and take more control of coverage.

• Accumulate loss funds to protect against the effects of wildfire.

• Be built with a more focussed risk profile to tailor-make a policy suitable for customers exposed to wildfire.

Captives.insure also said captives can, in this challenging landscape, emerge as “a beacon of hope for businesses”. The company pointed out that captives offer a unique set of advantages in managing climate-related risks. They provide the flexibility to create customised coverage for perils that may be excluded or limited in traditional policies. They allow companies to insure against specific weather events through parametric coverage and build reserves for catastrophic risks such as hurricanes and wildfires.

Moreover, captives can provide stability in pricing and availability of coverage, reducing reliance on volatile commercial insurance markets. They offer businesses the opportunity to retain underwriting profits during favourable years and gain greater control over their overall risk management strategy.

Captives.insure concluded: “As we look to the future, it's clear that the Los Angeles wildfires are more than just a localised disaster. They represent a turning point for the insurance industry, highlighting the need for innovative solutions in the face of increasing climate-related risks. Captive insurance, with its flexibility and customisation options, stands out as a powerful tool for businesses navigating these uncertain waters, offering a path to greater resilience and financial stability in an increasingly unpredictable world.”

There is no time to lose. Minds will have to concentrate quickly on solutions to this crisis. As Captive International was writing this article, new wildfires have broken out in Southern California, near San Diego.

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