Insurers brace for losses of up to $20bn from California wildfires

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Insurers are bracing for losses of as much as $20bn from wildfires in Los Angeles after blazes ravaged some of the most exclusive neighbourhoods in California, according to early estimates from analysts.

JPMorgan analysts on Thursday doubled their expectations for insured losses from the $10bn they estimated a day earlier, citing limited progress on containment and the spread to neighbouring areas.

“Expectations of economic losses stemming from the fires have more than doubled since yesterday to closer to $50 billion, and we estimate that insured losses from the event could exceed $20 billion (and even more if the fires are not controlled),” JPMorgan wrote in a note to clients.

Moody’s rating agency said it “would expect insured losses to run in the billions of dollars given the high value of homes and businesses in the impacted areas”, while rival Morningstar DBRS said preliminary estimates pointed to total insured losses of more than $8bn.

More than 100,000 residents have been ordered to evacuate, with about 15,000 structures at risk, up from 13,000 buildings on Wednesday.

Specialist insurance companies focused on the most expensive homes faced high payouts, JPMorgan said, with Allstate, Travelers and Chubb among the most exposed carriers in the state. Chubb has a particular focus on high-net-worth properties.

Allstate and State Farm are among the insurers that have recently stopped selling new home insurance policies in the state, blaming regulatory caps on price rises that made it increasingly challenging to cover losses. Insurers have also dropped customers in the most at-risk areas.

Last year, State Farm announced it would not renew policies for 72,000 homes and apartments in the state, including 69 per cent of insurance plans in the upscale Pacific Palisades area engulfed by the latest wildfires.

That has left many homeowners turning to California’s state-backed Fair Plan as well as less-regulated home insurance policies, so-called “non-admitted” insurers.

The Fair Plan, which at the end of September had just under $6bn of exposure to wildfires in the Pacific Palisades area alone, provides coverage of up to $3mn a property.

Insurers and analysts said the damage could rival that caused by the most devastating fires of recent years, including the 2018 camp fire in Butte County, California, which led to insured losses of $10bn.

The average property price in the Pacific Palisades area — where much of the damage from the latest wildfires is concentrated — is far higher than in Butte County, at more than $3mn compared with less than $500,000.

Climate change has intensified wildfire seasons in California. New development extending into fire-prone zones and the wildland areas surrounding major cities has also fuelled the rise in insured losses, along with higher home values.

Morningstar DBRS said the fires “reinforce the need for adequate rate increases on home insurance in California” as well as prevention and mitigation initiatives.

But the rating agency noted that the affordability of property insurance in California was “likely to remain a challenge . . . with many property owners opting to remain uninsured or underinsured because of the high costs”.

The cost of property catastrophe reinsurance, or insurance for insurers, has also risen sharply.

RenaissanceRe and Arch Capital were among the reinsurers exposed to the wildfires, JPMorgan said, with rising loss estimates increasing the likelihood that they will have to share in the payouts.