Fitch: Calif. Wildfires May Be Largest U.S. Wildfire Insured Loss Ever
Insured losses from wildfires continuing to spread in Southern California could likely become the costliest catastrophe insured loss event in 2007 and may potentially become the costliest wildfire catastrophe insured loss event ever for the property/casualty insurance industry, according to Fitch Ratings.
While it is still too early to make an accurate projection of the total insured damages from the wildfires that continue to spread, a preliminary estimate by EQECAT Inc. has indicated insured losses to date have exceeded $1 billion and will continue to grow. Risk Management Solutions (RMS) estimated insured losses of between $900 million and $1.6 billion and warned that losses could even exceed this level if the wildfires continue to spread.
Fitch estimates that each $1 billion of insured loss adds about 20 basis points to the industry’s 2007 loss ratio based on Fitch’s almost $440 billion 2007 net earned premium forecast. Fitch also notes that each $1 billion of homeowners insured loss adds about 190 basis point to the industry’s homeowners 2007 loss ratio.
The insurance lines of business most affected by this catastrophe are personal lines, particularly homeowners, but also automobile. However, commercial lines will also be affected with claims expected in commercial property and business interruption that could be significant. Fitch expects the majority of the losses will be confined to the primary and excess and surplus (E&S) lines writers, with a modest portion of losses ceded to reinsurers under catastrophe treaties, unless the losses increase to significantly higher levels and are treated in the aggregate as a single event.
The insured losses for this event could easily approach the largest catastrophe loss event thus far this year as reported by ISO’s Property Claims Services (PCS) unit of $1.2 billion in insured property damage from spring storms in mid April that affected 18 states and the District of Columbia. Furthermore, the insured losses have the potential to surpass the largest wildfire insured losses for the industry of $1.7 billion ($2.5 billion in 2007 dollars) for the Oakland Hills, Calif., wildfire in 1991 and $2.0 billion ($2.3 billion in 2007 dollars) for the Southern California wildfires in 2003 that affected an area very similar to the current wildfires.
U.S. property/casualty insurers are positioned to handle insured losses from this event as catastrophe losses have been well below average this year. PCS estimated $4.7 billion in catastrophe losses through the first nine months of 2007. This is considerably below the $7.8 billion in catastrophe losses through the first nine months of 2006 and about half of the $9.3 billion average over the first nine months for the past 15 years. This compares to over $41 billion in losses from Hurricane Katrina alone in 2005.
While insured losses are certain to be significant, they are expected to be within the level of losses that the insurance industry anticipates when pricing catastrophe risk into premiums. Furthermore, the insurance companies that write the lines of business in California most affected by the wildfires are generally the larger, national carriers that, as a group, have high insurer financial strength ratings. Fitch does not expect a major deterioration in financial strength if these companies incur losses roughly in proportion to their market shares. Also, given the high catastrophe prone risk and generally higher value of homes in these areas, a sizable portion of the coverage is provided by the E&S market, and may work to shift losses away from the traditional top admitted insurers.
The wildfires that continue to rage in Southern California have affected seven counties, which have been declared federal disaster areas (Los Angeles, San Bernardino, San Diego, Orange, Ventura, Riverside and Santa Barbara) stretching from the Mexican border to north of Los Angeles, with the majority of damage in the San Diego area. While reduced winds, expected cooler temperatures and more moist ocean air should help to reduce the spread of the fires as the week progresses, at least 12 major fires continue to blaze as they work to be contained. The wildfires have already consumed almost 500,000 acres and destroyed almost 2,000 homes and businesses, and forced the evacuation of almost 1 million people.
Fitch says the agency will continue to monitor development of the California wildfires and their impact on ratings within our insurance coverage universe.
Listed below are market share information on the top 10 homeowners writers in California for 2006:
($Mil. Source: Highline Data)
State Farm Mutual Group:
–IFS Rating – ‘AA+’
–CA Homeowners direct premiums written – 1,436 –Market Share – 21.7%
Farmers Insurance Group:
–IFS Rating – not rated by Fitch
–CA Homeowners direct premiums written – 1,097 –Market Share – 16.6%
Allstate Insurance Co Group:
–IFS Rating – ‘AA+’
–CA Homeowners direct premiums written – 888 –Market Share – 13.4%
California State Automobile Association:
–IFS Rating – not rated by Fitch
–CA Homeowners direct premiums written – 414 –Market Share – 6.3%
United Services Automobile Association Group:
–IFS Rating – ‘AAA’
–CA Homeowners direct premiums written – 295 –Market Share – 4.5%
Inter Insurance Exchange of The Auto Club:
–IFS Rating – not rated by Fitch
–CA Homeowners direct premiums written – 266 –Market Share – 4.0%
Nationwide Group:
–IFS Rating – ‘AA-‘
–CA Homeowners direct premiums written – 233 –Market Share – 3.5%
Mercury Casualty Group:
–IFS Rating – ‘AA-‘
–CA Homeowners direct premiums written – 197 –Market Share – 3.0%
Safeco Insurance Co Group:
–IFS Rating – ‘AA-‘
–CA Homeowners direct premiums written – 182 –Market Share – 2.8%
Firemans Fund Insurance Group:
–IFS Rating – not rated by Fitch
–CA Homeowners direct premiums written – 166 –Market Share – 2.5%
Source: Fitch, www.fitchratings.com