APCL View of Californian Wildfires as at 14th January

California has been experiencing unprecedented wildfire activity, particularly in the Los Angeles area, marking some of the most destructive fires in the state's history. According to the California Department of Forestry and Fire Protection (CAL FIRE), over 40,000 acres has burned, equivalent to 60+ square miles, with over 12,300 structures destroyed. The Palisades Fire, the largest in Los Angeles County, has burned nearly 24,000 acres, destroyed approximately 5,000 structures, and was only 13% contained as of Sunday 12th January. The Eaton Fire (over 14,000 acres) and Hurst Fires (nearly 800 acres) are 27% and 89% contained. There are 24 confirmed deaths with a further 16 reported as missing. High winds, reaching up to 100 mph, and extremely dry conditions have exacerbated the situation, making firefighting efforts particularly challenging with conditions expected to worsen again this week in western areas of Los Angeles.

While the impact on the residents and families who have lost their home and livelihoods is incalculable, the economic impact is substantial, with preliminary estimates indicating losses between $135 billion and $275 billion. Even at the low end of the estimate, these figures materially exceed the damages from previous significant wildfires in 2017/2018, with the economic impact estimated by Swiss Re to be in excess of $50bn,  highlighting the severity of the current situation. Typical early-take sources estimated overall insured losses to range from $10 billion to $25 billion however, recent reports are showing this may be optimistic and losses could push above $30 billion. This size loss has the potential to be much bigger than more recent, similar events such as the Lahaina wildfires of 2023 which resulted in a $3.2billion loss. Syndicates we have spoken to have said it is too early to put a definitive number on the event as it continues to develop.

While there are specialists actively writing wildfire exposures, overall Lloyd’s has reduced its direct exposure to property damage, business interruption and liability coverage following the wildfires of 2017 and 2018 and we anticipate the exposure will mainly be through reinsurance streams. Historically, Lloyd’s share for major natural disasters tends to be around 6% but at this time, it is too soon to be sure of the exact market impact. For context however, if insured losses were finalised towards the higher end of the range, we would estimate this to mean a movement less than three percentage points on market loss ratios. Although this is damaging so early in the year, syndicates would not see it as year defining and within their catastrophe budget. It is also worth remembering that the asymmetrical distribution of exposure for a wildfire event is much more evident than for other events like hurricanes, whereby some syndicates may be heavily impacted whilst others not at all. Furthermore, the decline in direct business being written and high net worth individuals moving to the E&S Market or The California FAIR Plan for coverage are some factors which allow us to anticipate this will be a manageable loss.

The FAIR Plan, established in 1968, is a state run concept for high risk properties providing a temporary safety net for individuals who have not been offered coverage from a traditional property insurer. Although an appealing offer to many individuals, if The FAIR Plan runs through its reserves, they turn to reinsurance and impose an assessment on domestic insurers in line with their market share. The magnitude of this event means this plan is likely to become heavily diluted.

Climate change is a significant factor contributing to the increased frequency and intensity of these wildfires. Warming temperatures and prolonged drought conditions have created an environment where wildfires can ignite and spread more easily, even during winter months. The current dry period is considered to be the most severe in modern history, further intensifying the wildfire threat. Factors including increased vegetation from the wettest summer on record in 2023, subsequently drying out through the recent droughts and, the state wide issue of housing requirements causing construction further into the wilderness have further fuelled the intensity of these wildfires.

In response to the crisis, Governor Gavin Newsom has declared a state of emergency, and President Biden has offered federal assistance. Evacuation orders have been issued for over 130,000 residents, including those in high-profile neighbourhoods such as the Hollywood Hills. The situation remains dynamic, with firefighting resources stretched thin and ongoing efforts to contain the blazes.

We are monitoring the situation and will remain in touch with syndicates who may have exposure. We will report further when we have more detail.