The Los Angeles wildfires could cause record insured losses of at least $US20 billion ($33 billion) based on preliminary estimates, as the winter disaster further highlights the implications of rising catastrophe risks.

American Property Casualty Insurance Association president David A. Sampson says the catastrophe is on a huge scale and the full scope of damage is unclear. The largest fires remain uncontained and a wind “red flag” warning is in effect for early this week.

“Preliminary insured loss estimates are upwards of $US20 billion, which would make this the costliest insured loss due to wildfires in history, globally,” he said.

“We are closely monitoring the impact on the market.”  

The fires that started last Tuesday (local time) have destroyed more than 12,000 structures and raised concerns over insurance protection gaps. The death toll has risen to 24.

Some major insurers have reduced their exposures or exited the Californian home market over the past couple of years as regulation has kept premium increases artificially low in the disaster-prone state. The California FAIR Plan operates as an insurer of last resort.

“Recent reforms to stabilise California’s insurance market are important, but they have yet to be finalised or implemented,” Mr Sampson said. “The fires will no doubt pose additional challenges and delays in rebuilding a healthy insurance market in California.”

S&P Global Ratings says in a January 9 report that the disaster could match insured losses of about $US16 billion ($26 billion) from the October 2017 northern California Tubbs fire, while the 2018 Camp fire caused about $US14 billion ($23 billion) in losses.

“Although expected losses are steep, we believe many of our rated insurers have the capital resilience to absorb them, after strong results in the first nine months of 2024 (and likely for the year),” insurance analyst Patricia Kwan says.

Reinsurer losses are expected to stay within natural catastrophe budgets for the quarter, while the sector has entered the year with robust capitalisation.

“For now, we believe the impact of the wildfires is manageable for global reinsurers, with no major impact on earnings,” Ms Kwan said.

“The wildfire represents the first major natural catastrophe loss in the year for the sector. However, it is still unclear how aggregate reinsurance coverage could be affected, given this will depend on developments over the remainder of the year.”

Drought and dry Santa Ana winds blowing towards the California coast have fuelled the fires. The Palisades fire, in an area with many expensive celebrity-owned properties, is 13% contained, while the Eaton fire affecting Altadena in the San Gabriel foothills is 27% contained. Other outbreaks have included the Hollywood Hills fire.

Insurance Council of Australia climate, social policy and international engagement GM Alix Pearce says the winter fires are a reminder that extreme weather events are worsening, while bushfire seasons are lengthening.

In Australia, cover affordability and availability implications are felt most acutely in communities exposed to cyclone, flood and bushfire, while across the country premium pressure is driven by extreme weather, inflation, global reinsurance prices and supply chain shortages, she told insuranceNEWS.com.au.

“While it’s too early to predict whether there will be cost implications for local insurance markets, the LA fires have occurred in the context of a global reinsurance industry that has already been stressed by increasing extreme weather and inflation,” she said.

Ms Pearce says in the short to medium term, the industry is focusing on strengthening the resilience of communities and businesses through infrastructure, building stock and land use planning.

“In the long term, consistent resilience investment is crucial, along with addressing the underlying driver of worsening extreme weather – climate change,” she said.

About one in 12 (or 1.2 million) properties here have some level of flood risk and at least 230,000 of those are at risk of flooding every 20 years, while 5.6 million homes face bushfire risk, ICA says.

“Australia’s population continues to grow in places with greater exposure to storms, floods, bushfires and cyclones,” Ms Pearce said. “If we don’t implement policies to mitigate this risk, we will continue to see a widening of the insurance protection gap.”

University of Tasmania professor of pyrogeography and fire science David Bowman says the LA fires crossed from housing on the city border to suburban environments in an incredibly fast escalation.

He says Australia also has dry and warm downslope winds that can come over a barrier such as a mountain range and move quickly, noting in an article in The Conversation that fires moved into suburban Canberra in 2003 and it could happen again in cities such as Sydney or Melbourne.

“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,” he said. “The degree to which it would spread depends on the suburban landscape and how well prepared the area is.”