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In the wake of recent devastating wildfires in California, Howden Re has called for reforms and action to encourage more risk capacity to help in closing the protection gap crisis in the state, saying that both traditional reinsurance and capital markets will be needed, as well as innovative risk transfer such as parametric solutions.

In particular, the reinsurance broker states that “accelerated adoption of regulatory reforms, risk-based pricing, risk mitigation improvements and public-private collaboration” are the “only viable path to restoring much-needed insurance market stability.”

Howden Re’s report published today blames the California insurance market’s sub-optimal regulatory framework, the escalation of wildfire risks, and persistent underwriting losses for what it sees as a protection gap crisis in the state.

Significant underinsurance is evident in the wide gap between economic and insurance market losses from the recent Los Angeles, California wildfires.

But, analysis by the broker suggests that strategic investments in enhanced risk management and wildfire mitigation amounting to $6 billion could have cut estimated economic losses of $75 billion from the wildfires by as much as half.

Catastrophic losses from wildfires in the state and California’s regulatory environment have stifled supply and insurance market competition, by restricting risk-based pricing and making it unprofitable for private market insurers to operate there, Howden explains.

Tim Ronda, CEO of Howden Re, said, “The tragedy in California is a wake-up call. Wildfire insurance in the state can and should work long-term but to do so requires significant reform. At its core, insurance is a force for good. What we saw in California was an avoidable capacity crisis brought on by slow-moving regulation, insufficient risk mitigation measures, and a lack of competition and innovation. It is also a canary in the coal mine. Without urgent adoption of recent regulatory reforms, the situation will worsen. Not only in California, but in other high-risk markets that must study what happened and adapt accordingly before history repeats itself elsewhere. The industry must step up and partner with policymakers to create a sustainable insurance market that benefits both insureds and the broader economy. Howden has solutions and is ready to lead.”

Howden’s report calls for “a combination of regulatory modernisation, market-driven solutions, and investment in resilience,” to help stabilise California’s insurance market.

Key is rebuilding private market confidence to deploy capital and capacity, with risk commensurate pricing seen as vital, as well as mitigation efforts.

Expanded public-private partnerships are part of the proposed solution, to help distribute risk more effectively and enhance availability of insurance, alongside incentivised risk mitigation and innovative risk transfer, all with the goal of attracting capital and restoring confidence in California’s insurance market.

Julian Alovisi, Head of Research at Howden, explained, “As climate risks continue to evolve, insurers must be more agile and innovative in how they approach risk. However, this change cannot happen in a vacuum and collaboration is needed to restore balance and ensure long-term insurability. This is not just an insurance issue – it’s an economic and social imperative.”

Howden’s report states, “Public-private partnerships could play a role, initially at least in supporting private market participation, and reinsurance will be front and center of solutions that include recapitalization of the FAIR Plan, reinsurer-backed MGAs, capital market participation (ILS, ILWs) and innovative product design.

“There is also an opportunity for the insurance sector to go beyond traditional risk transfer and support risk mitigation and prevention.”

All forms of capital and capacity are required, to help California’s insurance market recover and move forwards on a more stable and healthy footing.

Howden Re notes that, “Reinsurance and capital markets are essential partners to putting the private market on a more sustainable footing.

“Both markets offer large, efficient and diversified sources of contingent capital to protect against outsized losses.”

Adding, “There is an opportunity to play an even bigger role given their participation is currently triggered at the upper end of projected loss ranges for the Los Angeles wildfires.”

In addition, Howden calls for innovative managing general agent (MGA) models to embrace alternative capital sources as well as modern risk transfer techniques.

The broker explained, “MGAs have an important role to play in enabling the redeployment of capacity into the California insurance market due to their ability to leverage technology, specialist underwriting expertise and broad risk capital access. Several innovative approaches, backed by multiple sources of third-party risk capital from Bermuda and London, are emerging.”

Product innovation is also key, with Howden calling for artificial intelligence (AI) and modern technology, as well as responsive risk transfer through parametric triggers.

“New products can also help fill coverage gaps. Parametric insurance will become an increasingly important and relevant offering as it provides pre-agreed payments when certain thresholds are exceeded and can pay out within hours or days of a loss,” Howden said.

Mutualisation of risk and community-based insurance models should also be in-scope for reforming California’s insurance market after the fires, Howden believes.

Ultimately, there is a need for a concerted approach, with regulatory reform needing to continue, both for the insurance market and also for building standards and risk mitigation, which can lay the foundations for making California risk more attractive to underwriters.

The ability to charge a risk commensurate rate for capital deployment is also vital, but reforms and mitigation are what can help to make insurance more affordable for those in wildfire risk areas, so the effort needs to span all the avenues Howden Re has highlighted.

Capital is indeed an essential partner, in all its forms and from all its sources. But capital must be able to see a way towards profitable deployment, else encouraging it back could be a challenge.

Read all of our coverage related to the Los Angeles, California wildfires here.

Reinsurance and ILS both essential partners for California after wildfires: Howden Re was published by: www.Artemis.bm
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