Regulatory reform and improved risk management are needed to create a stable and sustainable private insurance market in California after the LA wildfires, according to Howden Re. 

Modelling companies’ insured loss projections for the fires range from $US20-$US45 billion ($32-72 billion) and underinsurance levels are likely to be high, the company says in a report.

“The shocking impacts demand a decisive, co-ordinated and sustained response from communities, regulators and the insurance industry to prevent devastation on this scale happening again.”

Many homes hit by the Eaton and Palisades fires were built before new construction standards were introduced in 2008.

Howden Re says California wildfire claims before this year averaged $US200,000-$US300,000 ($318,000-477,000) for residential, or $US400,000-$US500,000 ($636,000-796,000) when commercial is factored in, but levels will be much higher for the Los Angeles fires.

Contents claims from high net worth homeowners are also likely to be sizeable, with items such as classic cars, art, wine and jewellery often separately insured, frequently through Lloyd’s.

It is estimated up to 80% of Californian homes are underinsured, with default increases of about 5% in annual rebuild cost adjustments at renewal failing to keep up with inflation, while regulated “rate suppression” has led to insurers exiting the market.

Howden Re analysis puts the last resort FAIR Plan’s market share in postcodes hit by the Palisades fire at 22%, compared with about 3.7% statewide. The plan’s $US3 million ($4.8 million) cap is likely to be too low for many properties. 

The reports says pricing regulations introduced late last year are positive, but the rate approval process must be accelerated. The average wait is about 280 days, against a target of 60. 

Howden Re calls for improvements around disaster planning, and forest and land management, and flags the need to rebuild better. It says regulatory reform and better risk management will attract capital to the market through several channels.

Public-private partnerships could play a role, “initially at least”, in supporting private market participation, while reinsurance and capital markets are essential partners in putting the private market on a more sustainable footing, it says.

Managing general agents, which can leverage technology and specialist underwriting expertise and capital, have a role to play. Product innovation such as parametric insurance can help fill coverage gaps, and community-based and mutual insurers also offer benefits. “(Re)insurance sector capitalisation is currently strong, but this loss brings significant challenges to the market,” the report says.