LA wildfires – implications for the upcoming Australian reinsurance renewals

In 2024, the Asia Pacific reinsurance market showed the first signs of premium softening, following large rate increases in 2022 and 2023. In the same month as the devastating Californian fires, January policy renewals continued easing with increased capacity and rate reductions across the global market (see chart below, with data sourced from Guy Carpenter, presented by Artemis.bm). But will this experience continue?

Softening market under pressure

The scale of the LA wildfires raises questions about the potential for flow-on impacts to reinsurer risk appetite and to the expectations of further softening at the 1 July renewals for the Australian market.

Adding to the concern is the sheer size of this event – with estimates of economic loss generally in excess of USD $100 billion and of insured losses up to USD $45 billion – compounded by continuing uncertainty. This includes doubt about the ultimate cost to be borne by insurers (much of the areas affected by the wildfires were underinsured or had no coverage), whether the fire constitutes multiple events, subsequent losses attributable to the fire (e.g. burnt areas having a greater propensity for landslides) and the pace of rebuilding.

What the industry has to say

Reinsurance is a major expense for Australian property insurers, accounting for approximately 30 per cent of premium revenue over the 12 months to 31 December 2024. With this in mind, we interviewed reinsurers and brokers to explore their view on the possible impact of the wildfires on the next renewals at 1 July in Australia.

Overall, there was general agreement that, in isolation, the wildfires were not likely to affect the trend of increasing risk appetite and capacity we’ve seen over the past year. Key factors supporting this view were:

• While rates softened over the past year, property reinsurance rates are at an all-time high, providing some level of buffer against a bad start to 2025, with plenty of capacity available at the 1 January renewals
• The 2023 market recalibration led to significantly increased rates and a shift to insurers retaining more risk, reducing the burden on reinsurers.

Too early to predict an impact?

Some insurers and brokers we spoke to believed it was too early to predict an impact, with costs and cleanup ongoing as well as uncertainty about catastrophic activity for the rest of the year.

Others indicated the wildfires may slow the pace of rate reductions, while further interviewees said while the wildfires in isolation would not affect market momentum, subsequent events throughout the year may.

In isolation, the wildfires were not likely to affect the trend of increasing risk appetite and capacity we’ve seen over the past year.

APRA mitigation efforts

The Australian Prudential Regulatory Authority is currently consulting on adjustments to its reinsurance settings. In seeking industry feedback (which closed on 17 February), APRA aims to address general insurer challenges to accessing appropriate, cost-effective reinsurance, with proposed changes to the capital adequacy prudential standard GPS116 that may reduce the amount of reinsurance they need to purchase and make Insurance Linked Securities a more attractive option for insurers.

Where to from here – this year and beyond

Many questions remain as to how the wildfires will actually impact 1 July renewals. In our view, experience to date points towards a continued softening market, but perhaps not to the level expected prior to the wildfires. Back home, communities and insurers are starting to assess the damage of ex-Tropical Cyclone Alfred, which may impact reinsurance appetite for Australian exposure at the next renewal.

In the meantime, all eyes are on the 1 April Japanese renewals, which will be the first major renewal to factor in the wildfire impact. Watch this space.