California wildfires outside market understanding of risk: S&P

The losses from California wildfires in 2017-2018 surprised re/insurers as the losses were outside of the market understanding of the risk, according to a report by S&P. 

The reinsurance pricing for California wildfires could be up 70 percent in some cases heading into the 2020 renewals season, said the S&P report, Jolted By California Wildfires, Re/Insurers Recalibrate Their Risk Appetite. 

It noted that re/insurers have traditionally focused on “hurricanes, tornadoes and earthquakes, which in the past have been major causes of property-catastrophe risk and losses.”

“Several re/insurers are not comfortable with their understanding of the risk, which has led to the sector taking a cautious approach, with many curtailing or stopping their underwriting,” S&P warned. “This has constrained the available capacity for this risk.” Capacity will continue to be constrained as the market remains in disarray, fueling further rate increases, S&P added. 

Insured losses from the wildfires amounted to around $33 billion, said S&P, affecting both property and casualty business lines. 

So far these losses have had limited impact on the creditworthiness of re/insurers, said S&P. But, it warned: “Considering the limitations of the wildfire catastrophe models, if re/insurers were to underestimate this risk, they may end up taking outsize exposures that could result in a capital event and ultimately hurt their credit worthiness.”