Filed Under:Risk Management, Loss Control

California wildfires to cost insurers over $4.6 billion, Moody’s reports

Todd Caughey hugs his daughter, Ella, on Oct. 10, 2017, as they visit the site of their home, which was destroyed by fires in Kenwood, Calif. (AP Photo/Jeff Chiu, File)
Todd Caughey hugs his daughter, Ella, on Oct. 10, 2017, as they visit the site of their home, which was destroyed by fires in Kenwood, Calif. (AP Photo/Jeff Chiu, File)

As northern Californians begin to assess the damage caused by the week-long fires that ravaged the area, a new Moody’s report estimates insured losses for P&C insurers will be among the costliest ever recorded.

Moody’s estimates losses will reach $4.6 billion or higher, based on data from the California Department of Forestry and Fire Protection (CAL FIRE). This number comes from data shown in Exhibit 1, where CAL FIRE estimates 5,700 structures have been destroyed with an average value of $802,000 per structure.

Moody's Investors Service

The wildfires began on Oct. 8 and spread rapidly due to high winds, low humidity, dry conditions and high temperatures. So far, the wildfires are responsible for at least 42 deaths and the destruction of 5,700 homes and commercial structures. As of Oct. 14, more than 221,000 acres have been burned, according to CAL FIRE.

The historic wildfires come after a devastating season of hurricanes and other natural disasters that caused high third-quarter catastrophe losses. Regarding the wildfires alone, catastrophe modeling firm RMS put out a preliminary insured loss estimate of $3 billion to $6 billion, noting substantial uncertainty around business interruption claims, particularly for the wine industry, as Napa and Sonoma valleys were hit the hardest.

Related: 10 things your clients need to know about wildfires

Moody’s reports most of the damage will fall to homeowners and commercial property coverages, noting potential effects on other lines of business, such as auto physical damage and inland marine. Insured losses will likely be worst among insurers with high exposure to northern California counties.

 Moody's Investors Service

(Source: Moody's Investors Service)

Moody's Investors Service

(Source: Moody's Investors Service)

While business interruption claims are a main concern, the Moody’s report adds that additional living expenses could also negatively affect California homeowners insurers given the evacuation of tens of thousands of residents. Typically, additional living expenses are capped at 30% of the dwelling’s value, and are only paid if the property is damaged or has been subject to a mandatory evacuation, the report explains.

Related: Understanding how property is valued after a fire

The report notes this year could be a record year for wildfires, reflecting a dangerous trend over the last decade. 8.5 million acres have burned across the U.S. in 2017, according to the Insurance Information Institute.

Moody's Investors Service

(Source: Moody's Investors Service)

Studies show that wildfire exposure in the western U.S .has increased in recent years, as shown in Exhibit 4, due to drier forests, a longer burning season, and higher average temperatures. This trend will likely affect some California homeowners and commercial property insurers' actions to reduce wildfire risk. Such actions could include reducing policies in affected regions, buying additional reinsurance or raising rates.

Related: Top California regulator: We may never know if PG&E caused fires

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