Executives at Bermuda-based reinsurer RenaissanceRe (RenRe) said today that the scale of industry loss from the recent California wildfires will affect reinsurance supply and demand, with the firm expecting new opportunities to deploy capacity as 75% of its US property catastrophe accounts renew over the next six months.
Within its fourth quarter and full year 2024 results, RenRe revealed that it currently estimates its pre-tax negative impact from the LA wildfires will be approximately 1.5% of the aggregate insured loss, so is expecting a pre-tax net negative impact of $750 million based on a total market loss of $50 billion, which is higher than estimates from cat risk modellers.
During the recently held earnings call, the firm’s President and CEO, Kevin O’Donnell, commented on the potential impact of the wildfires, what the loss might mean for future reinsurance renewal periods, and also why the firm has currently settled on a $50 billion insurance industry loss.
“First, this is a tail event for the wildfire peril, both in terms of absolute dollar loss, but especially with respect to return period,” said O’Donnell. “While our models performed well in our assessment of return period, a loss of this magnitude implies that both our models, as well as the vendor models, will need to steepen the curve in the tail to better reflect the higher frequency of severe events.”
He went on to note the rise in the frequency and severity of natural catastrophe losses, explaining that while climate change is a driver, human behaviour is equally contributing to growing losses.
“For example, a dense building with combustible materials in wildlife, urban interface was a major contributor to the California wildfire loss, as was land management practices,” said O’Donnell.
In terms of the $50 billion loss estimate, the CEO highlighted numerous factors contributing to the size.
“Including, the relatively high values of the properties located in the impacted areas, including a large component of fine art and other scheduled coverages. The influence elevated demand surge is likely to have on replacement cost values. The level of additional living expense exasperated by competition for temporary housing of a similar character to damaged properties. The prevalence of smoke damage across a broad geographic area. Assessments for the California FAIR Plan, offset by potential future recoupment. And finally, the potential for subrogation recoveries from the California wildfire fund.
“These factors can cause the estimated $50 billion insured market loss to shift up or down as the market loss develops. Our negative impact should vary accordingly,” said O’Donnell.
Regarding the broader market impact of the costliest wildfires in the history of the U.S., RenRe’s CEO emphasised that the scale of the loss is sufficient to affect supply and demand for reinsurance.
“The first quarter of 2025 will be the third consecutive quarter of elevated catastrophe losses. Most of our US property catastrophe programs are loss impacted. This will create increased demand for our products,” he said.
Adding: “We have the capital and we have the appetite to continue providing the protection that our clients and states like California clearly need in order to do so. However, property catastrophe rates need to remain firm or even increase. Two years ago, the reinsurance market underwent a step change in pricing and terms and conditions. At the time, I explained that this was to the benefit of the industry, as adequate rates would allow us to continue providing protection to our customers at the appropriate level, which is balance sheet protection.
“The California wildfire loss is a good example of the value of our approach to the step change. The magnitude of loss we anticipate paying is consistent with the tail nature of this event, and we were paid appropriately to protect against this risk.
“Since the step change, there has been much discussion regarding the relevance of reinsurance. I believe that the California wildfires once again demonstrate the continued, if not growing, value of the protection we provide our customers.”
Later in the call, David Marra, Group CUO at RenRe, reiterated that looking forward, the reinsurer expects an improving market for property catastrophe reinsurance with upward pressure on rates, and also new opportunities to deploy capacity.
“As Kevin mentioned, we have now seen three large catastrophes in the last three quarters. 75% of our US property catastrophe accounts renew over the next six months, and most are loss impacted. We were already expecting about $10 billion in new demand coming to the market this year. We now expect this demand to increase as companies review their reinsurance needs and likely purchase backup covers for the remainder of the year,” said Marra.
The CUO also provided some colour on where the firm expects the reinsurance portion of the $50 billion insured LA wildfire losses to come from.
“We expect the reinsurance portion of this to come from a few different areas. First, wildfire is typically a covered peril in catastrophe excess of loss towers. California wildfires will exceed retentions for many nationwide players, and could exhaust the towers of some California insurers. Should that happen, some treaty language may allow insurers to treat the fires as two separate events. However, where were they to do so they would need to take two retentions.
“Second, many reinsurance treaties cover assessments related to the California FAIR Plan… Third, some large losses, both from high value homes and commercial properties, will be ceded to the reinsurance market through quota share and per risk treaties, this will impact our other property book,” said Marra.
“And finally, there can be losses to the casualty market through third party liability, or losses to the specialty market from collectibles and Fine Arts. As with every large event, our underwriting and risk sciences teams are working closely together to update our catastrophe models to reflect what we have learned. At the upcoming renewals we will be ready to deploy capacity, but only if prices are commensurate with the additional risk,” he concluded.
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