Based on preliminary insured loss estimates, the reinsurance sector and its capital providers are expected to assume at least 30% of total insured losses from the Palisades and Eaton wildfires in Los Angeles, according to analysts at Moody’s.As we’ve been reporting, and the first estimates of insurance industry losses from catastrophe risk modellers, so far have a mid-point of $31.125 billion.while Moody’s RMS projects that losses will range between $20 billion to $30 billion.while Karen Clark & Company (KCC) recently said that the hit to the industry will sit close to $28 billion.

In a new report, Moody’s revealed that losses will be broadly distributed among the global reinsurance sector, noting that firms with exposure to homeowners insurers with high concentrations of business in California, and the California FAIR plan, could potentially see larger losses relative to the peer average.“Given the significant increase in the attachment points of most property catastrophe reinsurance coverages since 2023, we expect primary insurers will retain more of the losses than they would have a number of years ago.Based on preliminary insured loss estimates, we expect the reinsurance sector to assume at least 30% of total insured losses,” Moody’s commented.

It’s important to note that earlier forecasts from equity analysts had suggested that 10% to 15% of the overall industry loss would fall to reinsurance capital, but now Moody’s estimates that at least 30% will flow to reinsurance arrangements.That also means a larger share is likely to flow through quota share structures, and through certain retrocession arrangements too.“Reinsurers will see claims from primary companies under a variety of reinsurance coverages, including quota-share treaties and excess of loss property catastrophe coverages, as well as facultative and per-risk reinsurance, which are used by primary insurers to limit exposures on individual properties,” Moody’s added.

“Additionally, most reinsurance contracts also cover assessments on insurers imposed by the California FAIR plan.Some catastrophe bonds are exposed to losses from wildfires and could see claims rise to levels triggering payments.” A number of catastrophe bonds have recently seen further negative secondary market price movements due to potential exposure to aggregate attachment erosion, or actual losses, from the wildfires.the implied write-down, in mark-to-market terms from the wildfires, currently stands at around $200 million.

Which shows that the cat bond market could only shoulder a small proportion of the losses that flow to reinsurance capital.Furthermore, Moody’s explained that the impact on reinsurance pricing from the wildfires “is difficult to determine at this point.” “We think the wildfires are likely to provide some support to property catastrophe pricing during the mid-year reinsurance renewal periods, as the wildfire losses could erode significant portions of annual catastrophe budgets prior to the 2025 Atlantic hurricane season.“We also expect wildfire-exposed accounts to see significant scrutiny upon renewal as reinsurers recalibrate their risk assessment and appetites, pricing levels, and terms and conditions.” Importantly, Moody’s also addressed what would happen if losses from the wildfires were to exceed the California FAIR Plan’s resources.

“When losses exceed the FAIR Plan’s resources, California insurers are required to participate in FAIR plan losses through assessments that are determined in proportion to their market shares from two years ago for admitted business.For the first $1 billion in total personal lines and $1 billion in commercial lines assessments, insurers can recoup half their share of the assessments through fees billed to policyholders,” the firm added...

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.