Arch CEO: LA wildfire loss impact should be reflected in 2025 cat XoL pricing

By David Bull

March 11 - (The Insurer) - Catastrophe excess-of-loss (XoL) reinsurers are expected to take a $15 billion to $20 billion share of industry losses from January's California wildfires, which equates to a 30% to 40% loss ratio already in 2025, according to Arch CEO Nicolas Papadopoulo.

Speaking alongside other industry leaders during a panel discussion at the Bermuda Risk Summit in Hamilton on Monday, the executive said the impact of the wildfires on reinsurers should be reflected in 2025 cat XoL pricing.

Papadopoulo said that a hurricane at $40 billion of industry losses would be viewed as a medium-sized event, but that a Californian wildfire at that scale would be considered “one of those unforeseen events”.

“The issue is not so much about the loss itself. The issue is to be able to price for the risk you take. None of us would care about the volatility, as long as we get paid for it,” he commented, noting the challenges admitted homeowners insurers face in being able to charge the right rate for the risk.

He also suggested that a focus on risk mitigation related to perils such as wildfires would be reflected in the price charged by insurers to insureds.

But the Arch CEO also said that reinsurers should adjust pricing for upcoming cat XoL renewals to reflect the impact of the wildfire losses on their cat budgets and loss ratios already this year.

He said the current view is that the industry loss is probably at $40 billion to $50 billion.

“Our estimate of the portion of the loss going to the cat XoL reinsurance market is $15 billion to $20 billion. Based on the worldwide cat XoL market premium of $40 billion to $50 billion, that means it’s a 30ish to 40 loss ratio already this early in the year,” said Papadopoulo.

“I think that in itself, we view, should be reflected in some of the pricing we see later in the year,” he continued.

Also speaking on the panel, Convex Group co-founder and executive chairman Stephen Catlin pointed to the scale of the potential fine art loss from the Los Angeles wildfires.

“It’s not uncommon in those wealthy areas in LA for the property to be worth maybe 10% of the contents. It’s not clear how much of that contents was insured and it’s not clear where it’s been insured.

“It certainly won’t be on the contents (part) of the property placement, because it’s too big for that,” he suggested.

Meanwhile, Hiscox Re & ILS CEO Kathleen Reardon described California as “unique” because of the “reasonably heavy” regulatory oversight and complexities in areas such as the potential for subrogation and assessments after a wildfire event.

That means that a carrier’s claims capabilities are just as important as pricing the risk itself, she said.

“And I think the peril itself, the hazard, the vulnerability, is not a secondary peril. When we’re talking California, we’re talking a prominent primary peril,” said the executive.

Reardon said that amid shifting weather patterns, understanding the science behind the risk is key.

Catlin agreed that California wildfire should not be viewed as a secondary peril.

“A catastrophe is a catastrophe. Full stop. Now it is clear, I think, for many to see that climate change is having an effect globally, on fire and flood around the world,” he said.

Also speaking on the panel, Aspen group president Christian Dunleavy said that there is plenty of capital interested in assuming such risks, but only if it is able to secure a sufficient return.

“I don’t think that’s the challenge. The amount of inbound interest I suspect we all get after cat events and after different industry events have happened I think affirms that.

“What I think is ultimately going to get that capital over the line is really being clear on … being paid appropriately through a genuine risk-adjusted return. It doesn’t help our customers if we take on outsized risks and underpaid risks and ultimately lose our balance sheet strength and can’t pay claims,” he commented.

Dunleavy said the industry has done a “really good job” at building strength into its balance sheets over the last few years to be able to absorb a lot of the cat activity that has been seen globally.

He also highlighted the importance of public-private partnerships to be able to absorb some of the very large risks as exposure growth continues to climb.