The ultimate reinsurance exposure to the California wildfires will be significant but appears manageable, although the situation is evolving rapidly, AM Best says. 

More than 30 fires have affected the Los Angeles region since January 7, including the major Palisades and Eaton blazes, and the reinsurance determination on whether they are single or multiple events will mostly come down to contractual wording, the ratings company says.

The fires have also caused the price of catastrophe bonds, which provide an alternative form of reinsurance, to fall in the secondary market.

“Estimates are changing almost daily, but wildfire losses have driven bond prices down 10%-20% on average,” AM Best says. “The growing likelihood that bond capacity will be deployed bolsters bondholders’ desire for greater returns.”

The government-backed last-resort insurer, the California FAIR Plan, raised its reinsurance protection from $US8 million ($13 million) in ceded premium in 2018 to $US169 million ($269 million) in 2023.

AM Best says the wildfire losses are likely to lead to reinsurance pricing increases for the plan, while 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 policyholders,” it says.

AM Best notes the percentage of homeowners’ premiums written by surplus lines insurers, which are not regulated in the same way as insurers licensed in California, has increased almost tenfold in the past 10 years.