As insurers continue to count the cost of the 2017 and 2018 California wildfires, a few lessons and insights can be drawn from the tragic events.

The scale of these events is far greater than previous wildfires.  As the chart attached shows, the 1990s and 2000s saw smaller wildfire losses.  There has been a general increase in the size of the losses in each of these decades – but overall the market was paying out about $500m on average up to 2010.  Since then, losses increased before the unprecedented events of 2017.  Whilst results for 2018 are still to be published, the market is expecting another bruising year.

The 2017 and 2018 fires presented different challenges to insurers.  The 2017 fires included the Tubbs fire in northern California which damaged many vineyards in Napa and Sonoma Counties – whose grapes can sell for more than 10-times the State average.  These 2017 events will have a greater impact on Lloyd’s syndicates than the 2018 fires because mainly residential property was lost in the latter year.  Less of the California residential property market buy reinsurance compared to the commercial market which wrote the vineyard risks in 2017.  Accordingly we are expecting a greater impact to Lloyd’s for the 2017, rather than 2018 wildfires.

A chart of historical wildfire losses is available here.

In due course we will get the syndicate level loss numbers for the 2018 fires, until then, our comments can focus on why losses from wildfires are rising, and how Lloyd’s syndicates are responding:

  • Longer fire season – the period in which fires are burning has increased.  On average the ‘fire season’ was 84 days longer in 2003-12 than in 1973-82
  • Greater frequency of large fires – approximately 20 additional large (>400 hectares) fires per decade in US Forest Service land in Western USA from 1972-2012
  • Population growth in wildland-urban interface (WUI) – 42% growth in number of housing units and 35% growth in population in the WUI from 1990-2010
  • Projected climate change – warmer, drier conditions create an environment for greater, more devastating fires to establish.

From the perspective of insurers, wildfire risk is included in standard in US homeowners’ policies.  Generally speaking, US domestic homeowner insurers like State Farm and Allstate do not buy much reinsurance at Lloyd’s.  However Lloyd’s typically does provide reinsurance capacity to US insurers covering commercial risks such as the vineyards discussed earlier.  Nevertheless, the peril of wildfire is a concern for underwriters and it has been reported that the California personal lines market is trending toward a hardening market, with rate increases from 10% to 50% for brush exposed properties.

The CEO of MarketScout – a US MGA which uses Lloyd’s capacity – said in January “The brush and wildfire issues in California are similar to the windstorm issues suffered in Florida 12 to 14 years ago. Many insurers are trying to exit the California market.” This includes casualty reinsurers who, we are being told, are now excluding wildfire.