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Insurers are bracing for losses of as much as $10 billion from the Los Angeles wildfires after the blazes ravaged some of California’s most exclusive neighborhoods, according to initial estimates from analysts.
Credit rating agency Moody’s said it “expects insured losses to run into the billions of dollars given the high value of homes and businesses in the affected areas,” while rival Morningstar DBRS said preliminary estimates indicated total insured losses of more than $8 billion .
JPMorgan analysts said in a “very preliminary estimate to help investors assess the likely impact” that they believed insured losses “could approach $10 billion” based on an estimate of the affected area.
Specialty insurance companies focused on the most expensive homes are facing high payouts, JPMorgan said in a note to clients, with Allstate, Travelers and Chubb among the nation’s most exposed carriers. Chubb has a particular focus on high net worth real estate.
More than 100,000 residents were ordered to evacuate, while firefighters said about 13,000 structures were threatened.
Allstate and State Farm are among insurers that recently stopped selling new home insurance policies in the state, blaming regulatory restrictions on rising prices that have made covering losses increasingly challenging. Insurers also dropped clients in the riskiest areas.
Last year, State Farm announced that they would not renew policies for 72,000 homes and apartments in the state, including 69 percent of insurance plans in the upscale Pacific Palisades area that were consumed by the latest wildfires.
That’s why many homeowners have turned to California’s state-backed Fair Plan, as well as less regulated home insurance policies, so-called “unlicensed” insurers.
Fair Plan, which at the end of September had just under $6 billion in wildfire exposure in the Pacific Palisades area alone, provides up to $3 million in coverage per property.
Insurers and analysts say the damage could rival that caused by the most devastating wildfires in recent years, including the 2018 Camp Fire in Butte County, California, which led to $10 billion in insured losses.
Climate change has intensified California’s wildfire seasons. New development stretching into fire-prone zones and wildlands surrounding major cities has also fueled an increase in insured losses, along with higher home values.
Morningstar DBRS said the wildfires “reinforce the need for corresponding increases in California home insurance rates,” as well as prevention and mitigation initiatives.
But the rating agency noted that property insurance affordability in California “is likely to remain a challenge. . . with many property owners choosing to remain uninsured or underinsured due to high costs”.
The cost of reinsuring property against catastrophe, or insurance for insurers, also has grew rapidly.
RenaissanceRe and ArchCapital are among the reinsurers exposed to wildfires, JPMorgan said, but analysts at the bank forecast their losses to be smaller than those for similar events before 2023.
That year, many reinsurers raised the threshold at which policies begin to provide loss coverage, leaving primary insurers significantly more exposed than reinsurers.
