California wildfire losses will be within European reinsurer budgets
10/01/2025
Losses for Europe’s major reinsurers from the California wildfires are predicted to remain within budgets based on preliminary expectations of a $20bn cost to the industry, according to Berenberg.
More than 10,000 structures have now been destroyed by the wildfires burning around Los Angeles, according to the California Department of Forestry and Fire Protection but Berenberg analyst Michael Huttner said early indications suggest they will not lead to a material impact on 2025 earnings for Munich Re, Hannover Re, Swiss Re, and Scor.
This is due, in part, to the damage being largely concentrated on residential rather than commercial or industrial properties. Reinsurance cover is narrower for residential properties.
Based on a $20bn market loss, Berenberg said the current wildfires could cost Munich Re $220mn, Swiss Re $160mn, Scor €50mn, and Hannover Re €180mn. Berenberg said these figures were based on market share estimates, which include the benefit of retrocession cover.
The analyst said these losses would fall within the large loss budgets of each reinsurer, with an estimated 2025 combined ratio cost of 0.7 points for Swiss Re, 0.8 points for Scor and Munich Re, and 1 point for Hannover Re.
“We estimate that these losses would be equivalent to 8 percent of the large loss budget of each of the four reinsurers,” said Huttner, with Zurich likely to be affected more than its two peers as it is potentially exposed both as a commercial lines insurer and as a reinsurer of Farmers, which is the second-largest primary insurer in California.
Huttner said: “Homes in the most affected area, Palisades, are largely insured by the Fair Plan association to a potential loss exposure of, we estimate, $6bn.”
The Fair Plan pool system means that its portion of the loss will be broadly shared between participating insurers, which are the main insurers in California. The Fair Plan provides bare bones property coverage to those who are unable to obtain coverage in the voluntary market It currently offers limits of up to $3mn for residential coverage and $20mn in commercial coverage.
Last September, California’s insurance commissioner Ricardo Lara said around 3 percent of Golden State property owners were signed up to the Fair Plan which was established in 1968 and is a private association managed by California’s private insurance companies.
Huttner noted the shift in attachment points in recent years – from a typical level of €100mn to €400mn – as another factor behind Berenberg’s belief that the impact of the current wildfires will be lower for European reinsurers than from the Camp and Woolsey fires in 2018.
Of the $16bn in losses which arose from the Camp and Woolsey fires, Swiss Re reported an initial loss estimate of $375mn (subsequently revised down), Munich Re reported a loss of $500mn, Hannover Re a net loss of €193mn and Scor €99mn (later settled at €87mn).
JP Morgan had doubled its preliminary insured loss estimate from $10bn to $20bn, while wildfire-focused insurtech MGA Kettle raised its projection from $5bn to a range between $11bn and $17.5bn.
The Fair Plan, which has a concentration of exposure in the Palisades area, has access to up to $2.63bn of reinsurance protection through a partially placed tower that tops out at $4.85bn of limit and has an occurrence retention of $900mn. More than 60 markets are understood to be on the XoL program, which renews on 1 March.
Sources said 66 companies have taken positions on the Fair Plan’s 2024 reinsurance programme and at this stage, it is unclear which companies have prominent positions on the Fair Plan’s in-force 2024 reinsurance program.
However, information is available on who its biggest reinsurance counterparties were in 2023. According to data compiled by S&P Capital IQ, by far the biggest share of ceded reinsurance premiums in 2023 went to Berkshire Hathaway’s National Indemnity, while Allstate Insurance Co, Odyssey Reinsurance Co, Munich Reinsurance America and American Family Connect P&C Co made up the top five.
Zenith Insurance Co, Scor Reinsurance Co, Cincinnati Insurance Co, Berkley Insurance Co and Allstate’s Encompass Insurance Co completed the top 10.
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