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Insurers: Who pays the bill for brands in California?

Posted on by Peyom
Insurers: Who pays the bill for brands in California?

Insurance damage
Who’s footing the bill for the California wildfires?

Two cyclists ride past burned houses in Pacific Palisades

The fire left little else left of Pacific Palisades homes

© ZUMA Press Wire / IMAGO

The fire disaster in California could be the most expensive in the US state’s history for insurers. US insurance companies are primarily affected; European reinsurers are likely to get a fleeting escape

With an insured loss of around $20 billion, the wildfires in and around Los Angeles could be the most expensive in California’s history. The accounting experts probably have to look primarily at the large USInsurers like Allstate, Travelers and Chubb pay. They are behind the Californian “Fair Plan” insurance pool, which takes homes in vulnerable regions that would otherwise no longer have police under their wing. European reinsurers such as Munich Re and Swiss Re would get off less lightly than with the “Camp Fire” and “Woolsey Fire” series of forest fires six years ago, which cost a total of $17.8 billion at today’s prices.

In recent years, the major reinsurers have minimally increased the usual deductibles, the amount that the primary insurer must cover before they can access their reinsurance protection – from 100 million to 400 million. Dollar, wrote Berenberg analyst Michael Huttner on Friday. In addition, reinsurers traditionally play a smaller role in policies for private homeowners than in industrial insurance, where higher claims amounts are involved. Reinsurers can currently also leverage their market power in terms of conditions because demand for natural catastrophe coverage is increasing due to climate change.

If Swiss Re had to pay $375 million back then, today it would only be $160 million,” says Huttner. For market leader Munich Re it would only be $220 million instead of $500 million. The amounts would correspond to around eight percent of the subsequent major loss budget, so there would be no change in profit expectations. According to Huttner, the most affected among Europe’s primary insurers could be Zurich, which is not only active in corporate insurance itself but also acts as a reinsurer for farmers, California’s second largest insurer.

In total, the forest and bush fires have so far destroyed more than 10,000 houses and other buildings and 13,750 hectares of land have burned. In the Pacific Palisades suburb between Santa Monica and Malibu, where the fires caused the most damage, most homeowners were insured through the Fair Plan pool. Under the system, introduced in 1968 and overseen by the California regulator, the largest insurers share costs based on their market share in the state. It could be up to 6 billion. Dollars come. According to a report by the Thomson Reuters trade magazine “The Insurer,” they in turn have access to $2.63 billion and reinsurance protection.

The investment bank JP Morgan had estimated its damage estimate for the wildfires raging in the densely populated Los Angeles region on Thursday at 20 billion. Dollar doubled. The insurers and reinsurers themselves are still holding back on estimates.

Low premiums despite the risk of forest fires

According to a study by the rating agency Moody’s, after the series of wildfires in 2017 and 2018, many building insurers in California did not renew contracts, tightened conditions and allowed owners to better protect their homes from wildfires. Building insurance premiums have increased significantly in recent years due to forest fires and other natural disasters. Many owners therefore opted for the “Fair Plan”, which only offers limited protection and is often even more expensive than individual insurers.

Since 1980, wildfires and brush fires have burned in and around Pacific Palisades at least six times. Despite the high risk of wildfires, premiums are still among the cheapest in the United States, especially in the wealthy suburbs of Los Angeles, analysts say. This is also because the insurance regulator in California strictly regulates prices. “But that could be starting to change now,” says insurance professor Philip Mulder from the University of Wisconsin. Columbia Business School finance researcher Sangmin Oh has found that insurance customers in other states cross-subsidize premiums in California. In 30 states in the USA, the average premium in 2023 was higher than the $2,200 per year in California.

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