Limited risk appetite and rising costs fuel gaps in coverage for homeowners
California’s insurance framework may struggle to adequately address coverage needs for wildfires in Los Angeles, creating potential coverage gaps while leaving reinsurance companies largely unaffected.
Analysts have projected that reinsurers could absorb less than 3% of the insured losses stemming from the fires.
Governor Gavin Newsom said that the fires, which have damaged or destroyed approximately 12,000 buildings, could become the most expensive disaster in US history. Preliminary estimates suggest that insured losses may surpass US$20 billion.
The limited exposure of reinsurers reflects a strategic reduction in their natural catastrophe risk exposure in recent years. According to a report from the Financial Times, reinsurers have raised rates and increased attachment points, prompting primary insurers to reduce their own wildfire coverage in California.
This dynamic has left many homeowners without private insurance options, pushing them toward the state’s insurer of last resort.
Andrew Engler, co-founder of Kettle, a California-based wildfire insurance technology firm, explained that reinsurers scaled back their willingness to underwrite wildfire risks, leading insurers to follow suit.
State Farm and Allstate, two major providers of homeowners’ insurance in California, announced in 2023 that they would no longer issue new policies in the state. Both companies cited reinsurance costs, along with rising construction expenses, as reasons for their decisions.
Primary insurers have argued that California’s regulatory environment limits their ability to raise premiums to keep pace with increasing losses. In December, state Insurance Commissioner Ricardo Lara introduced new rules that would allow insurers to include reinsurance costs in their rate filings, potentially enabling premium increases.
However, the regulations had not been implemented by January, and experts predict that broader market trends could reduce their long-term impact.
As global insured losses from natural disasters have increased, reinsurers’ share of those losses has declined. Guy Carpenter reported that US reinsurance rates reached their highest levels since at least 1990 last year.
Over the past 25 years, reinsurers typically assumed about 46% of modeled catastrophe risk, but this figure dropped to 33% by 2023, according to data from Howden, another reinsurance broker.
Reinsurers remain focused on peak perils, such as hurricanes and earthquakes, but wildfires are less likely to reach the higher thresholds required to trigger reinsurance payouts. Munich Re indicated in a 2020 investor presentation that it had scaled back its appetite for so-called secondary perils, including wildfires.
The company cited wildfire losses of €500 million in 2017 and €430 million in 2018, during catastrophic California fires, as key factors behind this decision.
In a statement, Munich Re said it remains committed to providing catastrophe coverage globally but emphasized that pricing must adequately reflect the associated risks. Rising interest rates and inflation in 2022 further constrained reinsurance capital, prompting the industry to renegotiate contracts and increase prices.
The reinsurance market saw significant price increases in 2023 and 2024. Analysts noted that losses in January could drive further rate hikes when policies are renewed before the hurricane season.
Source: insurancebusinessmag.com
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