Wildfires can have devastating impacts. A recent wildfire in Los Angeles at the start of 2025 has already proved to be one of the costliest in U.S. history. It destroyed or damaged over 18,000 structures and led to the evacuation of around 200,000 people. Tragically, at least 29 lives were lost, and the insured losses may reach up to $45 billion. This loss represents about a third of the total expected insured losses for 2024, occurring within just two weeks. For many insurance companies, this financial blow significantly impacts their budgets for catastrophe losses.
This catastrophe puts pressure on the reinsurance market, but the effects may not be as severe as in the past. Many reinsurers have adjusted their strategies, stepping back from covering certain risks related to wildfires. However, some insurers are already reporting total losses on their reinsurance coverage, indicating that not all companies will absorb these impacts equally.
The U.S. significantly influences global reinsurance costs. This large, unexpected loss could lead to higher reinsurance rates later this year, particularly impacting markets in Florida and the Southeast, which are gearing up for hurricane season. When reinsurance costs rise, policyholders often end up facing higher premiums.
In California, insurers have traditionally relied on historical loss data for pricing. However, regulations introduced in late 2024 now allow the use of modern catastrophe modeling. These models help insurers assess risks more effectively. The aim is to improve coverage in high-risk areas and encourage mitigation efforts. Following the recent wildfires, many will watch to see if these new rules can help in managing risks better.
So, why are wildfires becoming more frequent and severe? Climate change and increased building in fire-prone areas are major factors. Rising temperatures and prolonged droughts drive more intense fire seasons. California’s fire seasons now seem almost year-round. Additionally, areas where urban communities meet wildlands have expanded, increasing the risk of catastrophic losses. By 2020, a significant portion of California’s housing was in these high-risk zones.
The impact of wildfires extends beyond homes. Businesses face threats like damaged properties and disrupted operations. Furthermore, wildfire smoke poses health risks. It can lead to long-term respiratory issues and has been linked to thousands of premature deaths worldwide due to poor air quality.
Modeling wildfires is challenging because human activity affects many risk factors. Fortunately, there are various tools available to understand and manage wildfire risks better. For instance, catastrophe models simulate how fires spread based on physical principles like heat transfer and wind. These models analyze numerous scenarios to estimate the likelihood of wildfires and their financial impacts, aiding in risk assessment and insurance planning.
Agencies like the U.S. Forest Service also create models to predict fire behavior based on weather and vegetation conditions. These tools assist in both risk management and real-time firefighting efforts. Companies like WTW offer specialized models that assess vulnerability and convert risk scores into potential loss estimates.
Recently, AI-based wildfire models have emerged, using machine learning to predict fire risks by analyzing extensive data, including real-time satellite imagery. Understanding these models is key to preparing for wildfires. As incidents become more frequent and severe, the need for effective modeling and risk management strategies will grow. This evolution will help insurers, policymakers, and communities manage and reduce wildfire risks more effectively.
1 California’s sustainable Insurance strategy
This article is meant to provide a general overview of the topic. For specific advice, consult a specialist.
