Insurance is a necessary expense of doing business, but CFOs can only do so much to influence how much they’re paying in rates. That said, they should be mindful of what’s going on in the insurance world—if the industry racks up huge catastrophe losses, for instance, that can impact an organization’s property insurance rate even if the organization itself suffered no losses from such an event.
Insurers are now getting a better picture of their losses from the Los Angeles-area wildfires, and not surprisingly, they’re pretty significant.
Travelers yesterday reported $1.7 billion in pre-tax catastrophe (CAT) losses, or $1.3 billion after taxes. These are preliminary estimates, the insurance carrier noted in a news release, and include losses from both its personal and commercial business segments.
When Travelers held its Q4 earnings call on Jan. 22, it didn’t yet have a handle on its wildfire losses. But even then, CFO Dan Frey told investors that the fires “are going to be a material event for the industry and will have a material impact on our first quarter earnings.”
Another insurance carrier also recently reported a billion-dollar-plus loss estimate. During a Jan. 29 earnings call, Chubb CEO Evan Greenberg gave an estimate of $1.5 billion pre-tax.
At least one insurer has already responded with a requested rate increase. Just over a week ago, State Farm, the largest insurance provider in the Golden State, asked regulators for an “emergency” 22% homeowners’ insurance rate hike in the wake of the devastating fires, CNN reported.
In a news release, State Farm said it had taken in more than 8,700 fire-related claims and had paid out more than $1 billion to policyholders as of Feb. 1, and expects to “ultimately pay out significantly more.” The wildfires “will be the costliest disasters” ever for subsidiary State Farm General, the company added.
Digging deeper. CAT losses are only one part of the equation for insurance rates. Another major factor is the cost of reinsurance (insurance for insurers), as insurance companies pass on increased reinsurance costs in their rates to policyholders. To highlight that point: A National Bureau of Economic Research working paper found reinsurance was “the main factor behind the higher prices homeowners face.”
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It was largely good news on the reinsurance front to start off 2025. Insurance companies with no losses saw rate reductions between 5% and 15% when renewing their property catastrophe reinsurance contracts on Jan. 1, according to a news release from Guy Carpenter. The reinsurance broker noted that reinsurer appetite, or the level of risk the industry was willing to take on, increased by 10% to 15%, while demand from insurance companies grew only 5%.
For its part, Travelers increased its reinsurance coverage for CAT losses this year, Frey said.
Of course, reinsurance pricing may look different in the future if insurance companies need to fall back on their reinsurance policies to cover some of their losses from the California fires—or other catastrophes lying in wait this year.
Chubb’s Greenberg said “the ultimate size of the loss” and how much of it spills onto “reinsurance…and to other balance sheets” will determine how much property insurance rates will go up, if at all. He added that current pricing “in my judgment overall is adequate.”
Big oof. California is in the middle of an insurance crisis. Fox Business recently listed all the insurers that have pulled out or dramatically scaled back their property coverage in the state. The list includes some big names, such as Allstate, Chubb, Farmers, Nationwide, and Travelers.
Chubb had cut its number in policies in half in the area of the recent California wildfires, according to Greenberg.
“Insurers are unable to generate a reasonable risk-adjusted return commensurate with the risk of ensuring natural perils such as wildfire and the cost in California associated with reconstruction following a disaster,” Greenberg told investors. He added, “We’re not going to write insurance where we cannot achieve a reasonable risk-adjusted return for taking the risk.”
As they contend with mounting insurance coverage and rate challenges, more businesses are looking to alternative risk transfer mechanisms such as parametrics, as CFO Brew previously reported.