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David A. Sampson, president of the American Property Casualty Insurance Association, highlighted the gravity of the situation, stating, "Preliminary insured loss estimates are upwards of $US20 billion, which would make this the costliest insured loss due to wildfires in history, globally." With containment efforts still underway and the region under a wind “red flag” warning, the full extent of the damage remains unknown.
The ongoing wildfires, ignited last week, have already resulted in over 12,000 structures being destroyed and a rising death toll of 24. The situation has raised significant alarm regarding potential gaps in insurance protections for affected residents.
In recent years, some insurers have either diminished their exposure or exited the California housing market. This trend has been influenced by regulations that have kept premium hikes in check amid the state's vulnerability to disasters. As a result, the California FAIR Plan serves as an essential safety net, providing coverage to those unable to secure insurance.
Sampson remarked on the need for reform, noting, “Recent reforms to stabilise California’s insurance market are important, but they have yet to be finalised or implemented.” He anticipates that the magnitude of the fires will pose additional hurdles in restoring a healthy insurance landscape in California.
According to a report from S&P Global Ratings, this disaster could rival the insured losses of the devastating Tubbs fire in October 2017, which incurred losses of $16 billion USD (around $26 billion AUD), as well as the Camp fire that resulted in losses of $14 billion USD (approximately $23 billion AUD) in 2018.
Despite the steep expected losses, Patricia Kwan, an insurance analyst, expressed confidence in the sector's resilience. “Although expected losses are steep,” she said, “we believe many of our rated insurers have the capital resilience to absorb them, after strong results in the first nine months of 2024.” This indicates that, while the losses may be significant, many insurers are well-prepared to weather the storm.
The fires have been exacerbated by drought conditions and dry Santa Ana winds that are pushing towards the California coastline. As of now, the Palisades fire is only 13% contained, while the Eaton fire in Altadena is 27% contained. Other fires, including one in the Hollywood Hills, continue to pose threats to the region.
Reflecting on global trends, Alix Pearce from the Insurance Council of Australia highlighted the broader implications of such disasters, “These winter fires remind us that extreme weather events are worsening, while bushfire seasons are lengthening.” In Australia, similar concerns about insurance availability and affordability are prevalent, especially in regions at risk from cyclones, floods, and bushfires.
She elaborated on the context of a global reinsurance market already strained by rising extreme weather events and inflation, emphasizing the urgent need for enhanced community resilience through improved infrastructure and planning. “In the long term, consistent resilience investment is crucial, along with addressing the underlying driver of worsening extreme weather – climate change,” Pearce stated.
Furthermore, David Bowman, a professor at the University of Tasmania, cautioned that the sprawl of urban development into fire-prone areas raises serious risks. He noted, “If you have the wrong wind and the wrong fire and the wrong time, a fire can be driven very quickly into an urban area.” Such experiences have already been observed in various cities worldwide, emphasizing that the lessons learned from the LA wildfires must resonate well beyond California.
As we witness the unfolding events in Los Angeles, the situation serves as a critical reminder of the urgent need for proactive measures to address the growing intersection of urban development and wildfire risks, along with the stark realities facing the insurance industry.
Published:Tuesday, 14th Jan 2025
Source: Paige Estritori
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