The impact of the fires on European reinsurers’ natural catastrophe budgets will clearly be significant, but the implications for their earnings and capital are not likely to be material.
Paris/London: The recent Los Angeles wildfires may use up over 30% of the aggregate natural catastrophe budgets set by Europe’s largest reinsurers for 2025, Fitch Ratings says. However, we still expect losses to remain within rating sensitivities due to the companies’ strong capital positions and diversified risk exposures.
Insured losses borne by global insurers and reinsurers will materially exceed highs from past wildfire events, with current industry estimates ranging from USD25 billion to USD45 billion.
European reinsurers have reduced their exposure to high-risk wildfire zones in California since the fires of 2017 and 2018 by shifting from proportional to excess-of-loss treaties and increasing attachment points.
However, they will still be materially affected given the scale of overall insured losses. Most of their losses will be from property and casualty reinsurance business, but they could also face significant losses from specialty reinsurance and, in some cases, from their directly written (“primary”) insurance cover.
“If overall insured losses for global insurers and reinsurers were USD35 billion, around the mid-point of industry estimates, we estimate this would translate into aggregate losses for Europe’s four largest reinsurers (Swiss Re, Munich Re, Hannover Re and Scor) equating to about 30% of the combined natural catastrophe budgets we expect them to set for 2025. We estimate that the top end of industry estimates, USD45 billion, would lead to the erosion of about 38% of their catastrophe budgets,” said Fitch.
The impact of the fires on European reinsurers’ natural catastrophe budgets will clearly be significant, but the implications for their earnings and capital are not likely to be material.
“We estimate that global insured losses of USD35 billion would generate losses for the four reinsurers equivalent to about 15% of their expected combined earnings or about 3% of their combined shareholders’ equity. However, these are only rough estimates, and the impacts will vary among the companies,” added the international rating agency..
Hannover Re, Munich Re and Swiss Re all set increased earnings targets for 2025, but before the fires.
“We do not expect them to alter their financial guidance as a result of the fires, given the prudence embedded in their earnings targets to provide a buffer against large-scale loss events. Munich Re confirmed today that its target was not affected. Scor does not have a public target.” explained Fitch.
It is too soon to assess how the fires will affect reinsurance pricing. The losses may slow the general decline from recent highs, but we do not expect them to drive a significant increase in rates, other than in particularly high-risk areas.