AM Best: LA wildfires to increase Fair Plan reinsurance costs, broader market impact less clear

By Mia MacGregor

Feb 6 - (The Insurer) - The recent Los Angeles wildfires have strained California's homeowners insurance market, driving more policyholders to the involuntary market, increasing reliance on surplus lines insurers, and impacting catastrophe bond prices, according to a recent report from AM Best.

Titled California Wildfires: Multiple Credit Negative Impacts for Insurers, the report noted that rising wildfire losses have prompted insurers to reassess their geographic exposure and reduce coverage in high-risk areas, resulting in a significant shift of policyholders to the California Fair Plan.

Between 2018 and 2024, Fair Plan policies rose by 276 percent, with premiums increasing nearly tenfold, according to data from the Property Insurance Plans Service Office.

AM Best cited Fair Plan data showing that dwelling policies grew by 123 percent and commercial property policies by 161 percent since September 2020.

Many insurers have scaled back or stopped writing new policies, focusing on lower-risk properties, the report stated.

The Fair Plan's underwriting performance struggled from 2018 to 2021, contributing to over $300mn in industry losses.

While property results improved in 2022 and 2023, AM Best expects the LA wildfires to significantly impact 2025 results.

Additionally, AM Best noted that surplus lines insurers have become more prominent in California’s homeowners market, with their share of homeowners premiums rising from 0.4 percent nationally in 2013 to 3.8 percent in 2023. California's share of national surplus lines premiums jumped from 4.6 percent to 23.5 percent over the same period.

Homeowners premiums written by the surplus lines market surpassed $2bn in 2023, according to AM Best.

Catastrophe bonds have also faced negative secondary market price movement, dropping 10 to 20 percent on average due to potential wildfire exposure, the report stated.

AM Best said that the ultimate reinsurance exposure to the California wildfires "will be significant but appears to be manageable at this point", adding: "The situation continues to evolve rapidly."

The California Fair Plan has significantly increased its reinsurance protection, from $8mn in ceded premium in 2018 to $169mn in 2023.

AM Best noted that this rise reflects both additional protection and higher prices due to increased property exposure, which has tripled since 2020. National Indemnity assumed more than half the reinsurance premiums from the Fair Plan in 2023, with the remainder spread across other insurers.

"The large losses due to the current wildfires are likely to lead to pricing increases in reinsurance for the FAIR plan," the report said. "Any impact on the broader property catastrophe reinsurance market remains to be seen. Pricing and terms of reinsurance for the California Fair Plan will be critical to ensure the plan is adequately funded and able to properly support the policy holders," the report said.