Los Angeles fires to lead to ‘costly’ losses
Multiple large and devastating wildfires are currently impacting the Los Angeles County area in Southern California, according to the latest report on the event by Acrisure Re.
As of Thursday afternoon, the 2 largest fires were the Palisades Fire impacting the Pacific Palisades community west of Los Angeles and the Eaton Fire impacting the Altadena neighbourhood north of Los Angeles. These fires have spread rapidly, igniting on Tuesday, January 7th and have both surpassed 10,000 acres burned in roughly 48 hours with the Palisades fire burning over 17,000 acres.
Weather conditions have improved with wind gusts dropping from up to 100 mph to around gusts of 30 mph with further improvements in the next couple days forecasted. According to CAL FIRE, both fires remain at 0% containment as the windy conditions have hampered firefighter’s efforts.
Unfortunately, so far there have been at least 10 fatalities reported from the Eaton fire and many more serious injuries.
Acrisure Re added that between the Palisades and Eaton fires, upwards of 17,000 structures are within the fire footprints. Households without power have decreased from about 1.5 million on Wednesday to about 200,000 on Thursday according to PowerOutage.us.
“It is very likely both fires will be in the top 5 most destructive and costliest fires in California history, and likely rivalling the fires of 2017/2018. In addition, the Sunset fire started Wednesday night near West Hollywood, but remains small at 42 acres with all evacuation orders in the area now lifted.”
While the fires in Southern California have only been burning for about 48 hours, it is very likely that both the Palisades Fire and the Eaton Fire will each be in the top 5 most destructive fires in California and US history, Acrisure Re concluded. Considering that the areas impacted have many high value homes, with the average home value in Pacific Palisades around $3-4.5 million, it is very likely the Palisades Fire will eclipse the Camp Fire as the costliest wildfire in US history. While some estimates for insured losses are around $10 billion, some estimates suggest have doubled in the last 24 hours to $20 billion and suggest the economic loss could exceed $50 billion, although it is extremely early to have a good idea of the potential economic and insured losses. For context, the largest insured loss from wildfire in US history, the Camp Fire, caused an economic loss around $16.5 billion and an insured loss of $12.5 billion, according to Munich Re.
In a statement AM Best said that it expects insured losses from the California wildfires to be ‘significant’, with more-concentrated individual insurers likely to be more negatively impacted. However, the longer-term impact on the state’s market also may be substantial as insurers will further re-examine their appetites for wildfire risk as it has become highly unpredictable with respect to location, intensity and seasonality.
In its Best’s Commentary, “Expanding California Wildfires Expected to Incur Large Insured Losses,” AM Best notes that ultimate insured losses will depend largely on the coverage secured by homeowners, many with high-value real estate, as well as the level of protection obtained by business owners. Demand surge and ongoing inflationary pressures also may drive up insurance claims-related costs.
“California residents have dealt with an increasing variety of severe weather events in recent years such as wildfires, along with a prolonged drought and multiple flooding events caused by atmospheric rivers,” said David Blades, associate director, Industry Research and Analytics, AM Best. “The changing weather patterns and climate conditions have resulted in increased volatility that has negatively impacted the results of insurers in the homeowners and commercial property lines.”
The impact of the wildfire losses will be felt less by national carriers because of their considerable risk-adjusted capital positions, according to the AM Best commentary. Past weather-related events that have affected California have created earnings events for these insurers as opposed to capital events affecting their balance sheet strength. However, because of unfavourable results over the last few years, State Farm General Insurance Company, the most concentrated California carrier from a total property insurance perspective, has sought significant rate increases for homeowners, condo owners and renters in the state, in addition to announcing plans to substantially decrease its policy count. Other insurers also have sought rate increases and taken initiatives to shrink their portfolios or cease adding new exposures.
AM Best also noted that California recently implemented regulations that would allow the cost of reinsurance as a factor in pricing and also allow the use of catastrophe models to account for mitigation efforts by homeowners, businesses and communities. “A wildfire catastrophe model currently under review by the state could enable insurers to better price this risk going forward, but the risk of wildfire is very high and very persistent. The effectiveness of the program in reducing insured losses will boil down to affordability and the availability of appropriate coverage,” said Sridhar Manyem, senior director, Industry Research and Analytics, AM Best.
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