While the Los Angeles wildfires are anticipated to be a major catastrophe event for the insurance industry, a new report from KBRA has highlighted that the sector is generally well capitalized to absorb the losses, although some individual carriers may be more heavily impacted than others.
With industry losses from the LA wildfires in the $20 billion to $25 billion range, and total economic loss estimates reaching up to $150 billion, analysts at KBRA have highlighted the significant protection gap in California’s property insurance market, which has been exacerbated by challenging conditions and inconsistent fire coverage across policies.
“Similar to the protection gap surfaced by Hurricane Helene—where a large proportion of policyholder losses were flood-related, which are typically not covered by standard homeowner policies—many of the affected home and business owners in Los Angeles may not receive reimbursement for their loss unless they had sufficient fire coverage,” KBRA’s report explained.
As per the firm’s analysts, the California FAIR Plan Association was created to meet the needs of state homeowners unable to find insurance in the traditional marketplace.
However, in recent years, its exposure book has reportedly increased dramatically, and, if current capital resources are insufficient, it may need to seek incremental sources of funding to cover policyholder claims.
As frequent readers will know, at the end of 2024, the California Department of Insurance implemented several regulatory changes requested by the insurance industry to make the state’s property insurance market more appealing to private insurers.
According to KBRA’s report, these changes included allowing rate filings to explicitly include reinsurance costs and permitting the use of predictive models, both of which were previously prohibited.
“These regulatory changes will likely lead to higher rate approvals in California and could potentially attract more capital to the market, although it will take several years for the impact of new entrants and improved insurance company financial results to benefit the market,” the analysts said.
Elsewhere in the report, KBRA observed that the January 1 reinsurance renewals for property insurers saw rates largely flat to down, with loss-free exposures receiving more significant rate decreases.
Now though, given these early catastrophic events in 2025, KBRA has anticipated that the midyear property renewals will experience a material impact as reinsurers adjust their risk appetite for catastrophe-exposed property in response to large payouts for the LA fires.
The firm concluded, “KBRA will continue to monitor the impact of these wildfires, as containment efforts remain ongoing. Property insurance rates in California, already poised for substantial increases, will likely rise further in the wake of this event.”
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