The Los Angeles, California wildfires are a tail event for the peril and will demonstrate the continued and growing relevance of reinsurance, according to RenaissanceRe CEO Kevin O’Donnell, who also explained today that “most of our US property catastrophe programs are loss impacted.”
The RenaissanceRe CEO further states that with the scale of the loss impact to the insurance and reinsurance industry still uncertain, he believes rates for protection must remain firm or even increase and he expects demand to rise.
Speaking during RenaissanceRe’s (RenRe) earnings call today, CEO Kevin O’Donnell said that the California wildfires may also drive a need to revisit catastrophe models for the wildfire peril.
“The level of destruction in the affected areas is truly catastrophic. An important component of our purpose is protecting communities by rapidly paying our claims, we hope to reduce the impact of this tragic event for the many people who have lost homes or otherwise have had their lives disrupted,” O’Donnell said.
“This is a tail event for the wildfire peril, both in terms of absolute dollar loss, but especially with respect to return period.
While our models performed well in our assessment of return period, a loss of this magnitude implies that both our models, as well as the vendor models, will need to steepen the curve in the tail to better reflect the higher frequency of severe events.”
He went on to explain, “Natural catastrophe losses are becoming larger and more frequent. Of course, climate change is one driver of this. It is equally true, however, that human behaviour is also contributing to growing losses.
“For example, dense buildings with combustible materials in wildlife urban interfaces was a major contributor to the California wildfire loss, as was land management practices.”
RenRe had reported in its latest results an estimate that the net negative impact to the company, pre-tax, from the wildfires could be as much as $750 million.
O’Donnell explained the loss estimate RenRe has been working from, an industry-loss of $50 billion from the fires.
“This market estimate is preliminary, and due to the recency of the wildfires subject to meaningful uncertainty that could cause material variation,” he said.
Further explaining that, “There are numerous factors contributing to the size of the market loss, including the relatively high values of the properties located in the impacted areas, including a large component of fine art and other scheduled coverages. The influence elevated demand surge is likely to have on replacement cost values. The level of additional living expense exasperated by competition for temporary housing of a similar character to damaged properties. The prevalence of smoke damage across a broad geographic area. Assessments for the California FAIR Plan, offset by potential future recoupment. And finally, the potential for subrogation recoveries from the California wildfire fund.
“These factors can cause the estimated $50 billion insured market loss to shift up or down. As the market loss develops, our negative impact should vary accordingly.”
O’Donnell also said that sensitivity testing undertaken by RenRe shows that, as the industry-loss level changes “our net negative impact remains around 1.5%.”
O’Donnell went on to discuss how the wildfires could affect global reinsurance market conditions, especially for coverage in the United States.
“The industry losses we expect from the California wildfires are at a scale where we would expect them to affect supply and demand for reinsurance,” O’Donnell said. “The first quarter of 2025 will be the third consecutive quarter of elevated catastrophe losses.
“Most of our US property catastrophe programs are loss impacted. This will create increased demand for our products.”
Going on to state, “We have the capital and we have the appetite to continue providing the protection that our clients and states like California clearly need.
“In order to do so, however, property catastrophe rates need to remain firm or even increase.”
O’Donnell continued, “Two years ago, the reinsurance market underwent a step-change in pricing and terms and conditions. At the time, I explained that this was to the benefit of the industry, as adequate rates would allow us to continue providing protection to our customers at the appropriate level, which is balance-sheet protection.
“The California wildfire loss is a good example of the value of our approach to the step-change. The magnitude of loss we anticipate paying is consistent with the tail nature of this event, and we were paid appropriately to protect against this risk.
“Since the step-change, there has been much discussion regarding the relevance of reinsurance. I believe that the California wildfires once again demonstrate the continued if not growing value of the protection we provide our customers.”
O’Donnell later noted in the call that the reason the company is using a market share for its estimate is due to the recency of the wildfires and the uncertainty still within publicly available industry loss estimates.
“We think 50 is a reasonable estimate, with the information that has been given us today,” he explained.
But added, “There is a greater probability of variability from this $50 billion than what we would normally produce, given the recency of the event, the limited access and the complications of it being in California.”
He also noted potential demand for back-up covers and what he expects for the wind-focused mid-year renewals.
O’Donnell said, “We’re in a strong capital position, we’re able to move into the market with confidence. It would potentially reduce the supply for others going into wind season, which will create more opportunities for us.”
Read all of our coverage related to the Los Angeles, California wildfires here.
