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With loss estimates for the Los Angeles, California wildfires having risen, there is now likely to be “considerable attachment erosion” for some aggregate catastrophe bonds that hold exposure to the wildfire peril, Florian Steiger, CEO of Icosa Investments AG has said.
Earlier this week, catastrophe bond fund manager Icosa Investments was first to highlight the still-developing wildfire catastrophe event brings into focus the subject of potential further erosion for aggregate catastrophe bond attachments.
Now, as clarity over the devastation that has occurred due to the fires in Los Angeles County improves, the chances of that happening is seemingly rising.
As we reported early this morning, California officials are now saying 10,000 structures have been destroyed or severely damaged across the two main wildfires that continue to burn.
Estimates for the insurance and reinsurance market loss from this fire event are ranging from $10 billion to $20 billion, with some analysts now warning that if the blazes continue the industry loss could rise even higher than that.
At the same time, estimates for the broad and consequential economic impacts of the fires now stand at up to $150 billion.
Commenting on the potential impact of the California wildfires in the catastrophe bond market, Icosa Investments said today, “Final loss estimates remain highly uncertain and should be viewed with caution. Adding to the complexity, multiple wildfires burning simultaneously could lead to differing impacts on occurrence cat bonds versus aggregate cat bonds.”
Adding, “A notable factor is that some aggregate cat bonds were already weakened during the hurricane season, with prior losses eroding their attachment points. This leaves them significantly more exposed for the remainder of their risk period, which often extends until June and includes the upcoming tornado season.”
Florian Steiger, CEO of Icosa Investments, provided some additional colour, saying, “What is already evident is that these wildfires will result in significant insured losses for the industry, even though it is unclear if cat bonds will be directly affected.
“At the very least, these fires are likely to cause considerable attachment erosion for some aggregate cat bonds. Notably, certain cat bonds were priced quite high following the recent hurricanes- a concern we highlighted several times in recent weeks.
“Given the scale of the losses unfolding, it wouldn’t be surprising to see significant price adjustments for a few of of these instruments.”
As Steiger said, it does remain uncertain whether cat bonds could face any direct losses from the wildfires at this time, but the subject of aggregate erosion is more likely to be a feature of pricing discussions later today, as broker desks mark their pricing sheets.
We understand that some of the USAA Residential Re catastrophe bond series that provide that insurer aggregate reinsurance protection are seen as the most exposed to erosion of their attachment deductibles at this time.
It’s also worth noting that there are, naturally, other non-securitised aggregate reinsurance and retrocession arrangements in both the traditional and alternative markets that will likely feel similar attachment erosion effects from these wildfire losses.
But, erosion does not necessarily equate to losses, although it can elevate the risk of impairment occurring across the rest of the annual risk period for these instruments, depending on the quantum of future qualifying catastrophe events.
Also read:
– LA wildfires: Over 10k structures destroyed. Insured losses up to ~$20bn, economic $150bn.
– LA wildfire losses unlikely to significantly affect cat bond market: Twelve Capital.
– LA wildfires unlikely to cause meaningful catastrophe bond impact: Plenum Investments.
– JP Morgan analysts double LA wildfire insurance loss estimate to ~$20bn.
– LA wildfires: Analysts put insured losses in $6bn – $13bn range. Economic loss said $52bn+.
– LA wildfires bring aggregate cat bond attachment erosion into focus: Icosa Investments.
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