The recent wildfires in the Los Angeles area are sparking intense scrutiny, with fresh data flowing in nearly every day.
Analysts are assessing a wide range of impacts, including insured losses, economic ramifications, shifts in credit ratings, and how these incidents might affect insurance premiums in the future.
Once the dust settles and assessments are finalized, the toll is expected to be staggering: thousands of properties will likely be destroyed, and the loss of life could be heartbreaking.
Current projections estimate that insured losses from the two most destructive fires could hit around $8 billion, while damage estimates from all five major fires could soar to $40 billion.
Overall, the total economic impact might reach into the hundreds of billions.
Impacts on Insurance Rates
According to S&P, property insurance companies are likely to respond to this financial upheaval by raising premiums, curtailing coverage options, or employing both tactics, not just in California, but also in other areas prone to similar disasters.
The situation could be further complicated if the California FAIR Plan encounters funding problems.
Over the last three decades, wildfires in California have increasingly shaped the property insurance landscape across the U.S., leading to rising premiums, shifting underwriting practices, and ongoing regulatory hurdles.
The wildfires that ignited in early January in Los Angeles County are poised to create substantial financial repercussions for insurers.
In light of these disasters, property insurance providers will likely increase rates and/or further restrict coverage.
While states like California, Oregon, and Washington currently enjoy some of the lowest average annual insurance premiums, S&P predicts these favorable standings will shift dramatically in the coming years due to the rising risks associated with wildfires.
Historically, homeowner insurance profitability in California has aligned with national trends over the past decade.
However, forecasts for 2025 hint at a return to the dramatic ratios observed during the catastrophic years of 2017 and 2018, when the state faced back-to-back wildfires.
Such a turn of events is expected to drive insurance costs upward across the state.
S&P has also cautioned that escalating insurance costs could squeeze housing affordability even further, potentially exerting downward pressure on home values, especially in a state already grappling with a stagnant population growth.
While S&P maintains a stable outlook on California’s credit ratings for now, the growing burden of insurance expenses and affordability hurdles might soon raise concerns about the state’s financial health.
Estimating Insured Losses
Preliminary forecasts from Moody’s RMS predict insured losses from the wildfires could reach up to $30 billion.
Catastrophe modeling firm KCC has pegged the damage from the Palisades and Eaton fires—affecting both privately insured policies and the California FAIR Plan’s coverage—at around $28 billion.
Meanwhile, Verisk’s estimates indicate insured losses from the Palisades and Eaton fires might range between $28 billion and $35 billion, factoring in the repercussions on the FAIR Plan.
As suggested by Gerald Glombicki from Fitch Ratings, the FAIR Plan could find itself under significant strain due to these extraordinary losses.
Recent analyses from Keefe Bruyette & Woods have even proposed estimates as high as $40 billion for insured losses, while CoreLogic suggests a range of $35 billion to $45 billion for the two main wildfires.
At one point during this crisis, five major wildfires were raging simultaneously in the Los Angeles area, with total loss projections expected to reach alarming levels.
AccuWeather recently updated its estimate of infractions and economic repercussions caused by these fires to a staggering $250 billion to $275 billion.
Effects on Credit Ratings
The precise implications of the wildfires on the credit ratings of major insurers in California are still unfolding.
Among the largest homeowners’ insurance providers in the state are names like State Farm, Farmers Insurance Group, Liberty Mutual, and Allstate Insurance Group, among others.
Fitch Ratings has indicated that while Mercury General Corp.’s credit profile may withstand the financial implications of the Eaton and Palisades fires, a negative outlook looms.
This outlook reflects possible credit deterioration and financial strain that could arise from another major disaster or a series of smaller, weather-related claims, along with concerns regarding the availability of reinsurance if another crisis strikes.
It’s worth noting that the wildfires in Los Angeles could account for more than 30% of the total natural catastrophe budgets earmarked for 2025 by leading European reinsurers like Swiss Re, Munich Re, Hannover Re, and SCOR.
According to analysis from the ratings agency, insured losses attributed to these global reinsurers are projected to surpass previous records set by earlier wildfire events.
While these European reinsurers will feel the budgetary strain, Fitch estimates that their overall earnings and capital will remain stable.
However, the California FAIR Plan does not have the surplus required to cover these anticipated losses, thereby pressuring local insurers to enhance the FAIR Plan’s financial viability.
Statistics show that the FAIR Plan faces a staggering $5.9 billion exposure related to the Palisades fire, marking its fifth-highest concentration of wildfire exposure.
At one point, five significant wildfires swept across the Los Angeles area simultaneously.
However, the most severe destruction came from the Palisades and Eaton fires.
The Palisades Fire, the largest of the two, has scorched 23,448 acres and is currently 68% contained, with aerial assessments indicating that approximately 7,700 structures have been impacted.
Meanwhile, the Eaton Fire, located near Altadena, has burned through 14,021 acres and is now 91% contained.
CalFire reports confirm that 9,418 residential and commercial buildings have been destroyed, with 17 tragic fatalities recorded.
Source: Claimsjournal
