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California wildfire risks could see reinsurance price increases of up to 70% between now and January 2020 renewals, due to higher expected losses projected by updated wildfire models, S&P Global Ratings Inc. said Thursday.
Pricing for primary insurance will also increase, especially on commercial lines business, S&P said in a report.
“Primary insurers will raise rates as much as they can in the commercial lines market or for high-value homes, constrain their capacity if they can't get the rates, or withdraw from the risk entirely,” S&P said.
The California wildfires of 2017 and 2018, with insured losses of around $33 billion, surprised reinsurers and insurers as the losses were outside of the market understanding of the risk and affected both property and casualty lines of business, S&P said in the report.
As a result, several reinsurers and insurers are not comfortable with their understanding of the risk and are reassessing their risk appetite, with many curtailing or stopping underwriting wildfire risks, S&P said.
“Reinsurance pricing for California wildfires could be up 30% to 70% heading into the 2020 renewals; capacity will continue to be constrained as this market remains in disarray, which will fuel further rate increases,” said S&P analysts.
However, rate increases may not be as apparent because the wildfire peril is usually combined with other reinsurance coverage for primary perils, so the impact of pricing changes gets somewhat lost in the aggregated pricing, S&P said.
“The past two years have clearly highlighted that these secondary risks are not to be taken lightly,” S&P Global Ratings credit analyst Hardeep Manku said in a statement.
“Considering the limitations of the wildfire catastrophe models, if re/insurers were to underestimate this risk, they may end up taking outsize exposures that could result in a capital event and ultimately hurt their credit worthiness,” he said.
Wildfires in Northern and Southern California continue to blaze as firefighters struggle to bring them under control, while early indications suggest possible lower total losses compared with the state’s 2017 fires.