A new commentary from AM Best noted that California policyholders increasingly turned to the state’s insurer of last resort and the non-admitted market for homeowners’ coverage even before recent wildfires, as primary insurers reduced availability.
According to Best’s commentary, California Wildfires: Multiple Credit Negative Impacts for Insurers, many voluntary market insurers reassessed their geographic exposure and reduced their willingness to cover high-risk areas. As a result, more policyholders sought coverage from surplus lines insurers, which have gained a larger presence in the state’s homeowners’ insurance market.
“Although comparatively modest, the percentage of homeowners’ insurance premium written by surplus lines insurers have increased by nearly 10 times over the last decade with premium surpassing the $2 billion mark for the first time in 2023,” said David Blades, associate director of Industry Research and Analytics at AM Best. “This activity reflects a substantial amount of premium leaving the admitted market and finding coverage in the non-admitted market.”
Market shifts have also led to a 276% increase in policies written by the California FAIR Plan from 2018 through 2024, based on FAIR Plan data for fiscal years ending Sept. 30.
The FAIR Plan and its supporting insurers experienced unfavorable underwriting results from 2018 through 2021, largely due to wildfires. California property insurance results improved in 2022 and 2023, but the January wildfires are expected to have a negative impact on 2025 results, according to the commentary.
Catastrophe bonds are also seeing negative secondary market price movement due to potential wildfire exposure. While estimates are still shifting, wildfire losses have driven bond prices down by 10% to 20% on average, AM Best said.
“The large losses due to the wildfires are likely to lead to pricing increases in reinsurance for the FAIR Plan,” said Christopher Graham, senior industry analyst, Industry Research and Analytics at AM Best. “Any impact on the broader property catastrophe reinsurance market remains to be seen, but 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 policyholders.”
Dubbed as the most catastrophic wildfires in the state’s history, media outlets have reported that the Palisades and Eaton fires may have caused total property and capital losses of up to $164 billion, with insured losses estimated at $75 billion.
