California wildfire costs set to impact European reinsurance giants

The ongoing wildfires in California are likely to be the costliest disaster in US history, according to California Governor Gavin Newsom. Private forecaster AccuWeather Inc. has put its initial total damage and economic loss estimates from the fires to be between $250 billion (€245.10bn) and $275 billion (€269.58bn).

Separate fires have raged across the region, including at the Palisades, Eaton, Kenneth, Sunset and Hurst. The fires have destroyed thousands of acres of land and structures and left 24 people dead so far, with thousands more made homeless. The Hurst, Palisades and Eaton fires are still burning. 

The financial loss from these fires will not be restricted to only US companies and properties. Major European reinsurance companies are also likely to be hit with significant losses as the number of claims mount. These losses may amount to approximately $1 billion (€0.98bn), according to Berenberg analysts, as reported by CNBC. 

Swiss Re is expected to face a loss of about €160 million, whereas Munich Re could be looking at losses worth approximately €220 million, according to Berenberg. Similarly, Hannover Re could suffer a loss of around €180 million, with Société Commerciale de Réassurance (SCOR) potentially losing €50 million. 

Swiss Re AG’s share price dropped 1.37% on Monday afternoon, with Munich Re’s share price also dropping 2.04%. Hannover Re’s share price fell 3.06% on Monday afternoon, with SCOR SE’s share price also losing 1.98%. 

However, Berenberg has highlighted that, while the financial sums of these losses may seem like a lot, they are expected to fall within the significant loss budgets set aside by the reinsurers. As such, they would affect 2025 company earnings if losses end up being more than previously anticipated by the budgets. 

Could the present California wildfires lead to an insurance crisis in the state?

California’s so-called insurance crisis has been brewing for several years now. That is as a result of the 2018 Camp Fire which resulted in significant losses for insurance companies that had issued Californian fire insurance policies that year. 

Since then, a number of key US insurance companies such as Allstate and State Farm have refused to issue new property insurance policies in California, or renew existing ones. That was mainly due to an escalating risk of catastrophe exposure, as well as the rise in inflation. 

In several cases, insurers have been unable to raise premiums by as much as needed to cover the increased risk, leading to their reluctance to offer new policies or continue with existing ones. 

One of the major reasons for the escalating catastrophe exposure is that more people have been moving to areas with a high risk of wildfires. Worsening and more frequent fires attributed to climate change have also added to the risk. It has become harder for insurance companies to predict the amount of losses that could arise from weather-related events, or to recover them. 

This has led to a rise in the number of uninsured homeowners in California, with LendingTree estimating this percentage to be 10.5% of all homeowners, coming up to about 806,600 people across the state. The majority of these reside in Kings, Lake and Humboldt counties. 

A number of other US insurance companies such as Farmers Insurance Group, Falls Lake Insurance and American National have also already limited their California coverage or left the state entirely, along with State Farm and Allstate. If this trend continues, it may become much harder for California homeowners to find affordable policies, which could exacerbate the risk of an insurance crisis in the state. 

Amy Bach, executive director of Californian non-profit consumer group United Policyholders, said as reported by NBC News: “We were all thinking 2025 is going to be the year insurers regain their appetite for the market in California, but having this catastrophe hit us right out of the gate is really unfortunate. Up until this latest disaster, we thought we might be turning a corner.”

However, Berenberg reiterates that both insurance and reinsurance companies are in a much better position to handle wildfire-related risks now than they were during the 2018 Camp wildfires. 

This is mainly because the current wildfires are largely impacting residential properties, rather than industrial and commercial properties. For reinsurers, this provides a small measure of comfort, as they tend to be less exposed to residential properties. 

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Reinsurance attachment points, which is the threshold at which insurance policies start to offer coverage for losses, are now much higher than they were in 2018, providing these companies with more of a safety net. 

Several residential properties in Palisades, one of the worst affected areas in the ongoing fires, are also insured under the FAIR Plan pool system. This means that any losses are distributed among a number of insurance companies, which lessens the burden on individual firms.