By Scott Vincent

April 10 - (The Insurer) - The wildfires that raged across Los Angeles in January provided (re)insurers with a renewed warning of the elevated risk landscape in which they now operate.

With preliminary estimates of the industry loss now largely converging at $40 billion or more, the wildfires look set to rival 2011’s Tohoku earthquake as the costliest first-quarter event on record.

Despite this, the market's strong capital position at the start of 2025 means that most international reinsurers have been able to absorb losses from the event with relative comfort.

While first-quarter losses will exceed the levels budgeted for by reinsurers at the start of the year, in most cases full-year earnings outlooks have remained in place.

And market sentiment points towards any pricing impacts being largely confined to clients and exposures directly affected by the wildfires during upcoming renewals.

Ahead of the Q1 results season, around $14 billion of net losses have been disclosed by listed carriers, alongside a $2.3 billion loss estimate by Lloyd’s.

Those insurers to disclose industry loss estimates largely expect the total to be in excess of $40 billion. The quarterly reporting season will provide clarity as to whether there has been any upward movement in those expectations, particularly given the expected increase in reconstruction costs following the sweeping tariffs introduced by U.S. President Donald Trump last week.

The event has highlighted the limited understanding the industry has around loss scenarios for wildfire events with longer return periods.

As Lloyd’s chief of markets Patrick Tiernan explained in an interview with The Insurer TV in March, data produced by syndicates has shown an “extraordinary range” of return periods for the January wildfires.

“The lack of consistency in the modelling is a challenge that needs to be addressed pretty quickly,” he said.

NO BLACK SWAN EVENT

One of the major takeaways from the modelling firms that spoke to The Insurer is that January’s LA wildfires were far from a worst-case scenario.

Both Moody’s and Verisk hold stochastic catalogues of simulated wildfire events which allow users to evaluate possible disaster scenarios.

And the Palisades and Eaton fires, which drove the majority of insured losses from the January wildfires, were not among the largest in those catalogues.

Firas Saleh, director of wildfire models for North America at Moody's, said: “It wasn’t a Black Swan event – if the Palisades Fire had moved further west and impacted Brentwood, the insured loss would be significantly higher.”

Similarly, the acres burnt by the Palisades and Eaton fires were significantly below other events contained within stochastic event sets.

Jeff Amthor, principal scientist for wildfire and crop modelling at Verisk, said in 10,000 years of simulated wildfire events within the Verisk model, more than 60% burn more than 200,000 acres and only 15% cover less than 50,000 acres.

In contrast, the California Department of Forestry and Fire Protection pegged the combined final size of the Palisades and Eaton fires at 37,469 acres.

The two events were separate fires with separate ignitions. There has been no consensus as to whether they should be considered as one or two events from an insurance and reinsurance perspective.

Verisk’s Property Claim Services unit, which compiles catastrophe loss estimates for U.S. events, designated the Palisades and Eaton fires as separate events. A spokesperson told The Insurer this would allow for a more precise understanding of the impact and implications of each wildfire.

However, the short distance between them (around 25 miles) and the close timeframe between ignitions (the Eaton Fire began within around eight hours of the Palisades Fire) means they will likely be largely considered as one event from a reinsurance perspective.

This was confirmed by Swiss Re CFO John Dacey during a media call in February when he highlighted that most reinsurance policies have an accumulation for events that occur within 168 hours.

DIFFERENT APPROACH

Lloyd’s Tiernan highlighted the need for insurers to have more of a focus on playing a role in prevention and containment.

“Dollar swapping, regardless of whether rates are strengthening or not, is not really a long-term strategy here,” he said.

Tiernan said Lloyd’s benchmarks and expectations for an LA wildfire event held up from a realistic disaster scenario perspective, with plans to revise how the market manages wildfire exposures.

“We’ll be developing our scenarios as we always do. It's likely we will have some more in there, because you always learn from these events,” he said.

Moody’s Saleh said wildfire was a peril that could be mitigated against.

“This event highlights the important role of mitigation and investment in resilience strategies, the importance of vegetation management and of hardening infrastructure. These wildfires underscore the importance of looking into all of these different factors.”

One indicator that the industry was embracing this challenge came through the April 2 announcement that Willis had structured a $2.5 million wildfire resilience insurance policy for Tahoe Donner Association, a private homeowners association in northern California, that takes into account efforts to mitigate fire risk when setting premiums and deductibles.

Globe Underwriting, which wrote the policy with backing from a Lloyd's syndicate, said it could quote a 39% lower premium and 84% lower deductible for the association when accounting for forest management.

Such efforts will likely become increasingly commonplace when structuring insurance contracts as the industry comes to terms with the new normal of elevated wildfire risk.