Based on sources, retrocessional reinsurance arrangements are usually not expected to play a very significant role in supporting reinsurers losses from the Los Angeles, California wildfires, other than support being received through quota share arrangements and collateralized sidecar structures.
The most recent on the insurance and reinsurance market impact from the wildfires is that catastrophe risk modeller loss estimates now have a mid-point average of $31.125 billion.
Equity analysts have suggested that at an industry lack of as much as $30 billion, the worldwide reinsurance market could shoulder between 10% and 15% of the full.
While at levels above $30 billion of industry loss, the share share for reinsurers is predicted to creep somewhat higher.
There continues to be some uncertainty related to how the wildfire events will probably be treated, with some insurers seemingly in a position to call on reinsurance support based on it being a single event, others as two and a few even having the alternative, corresponding to Mercury.
Those reinsurance terms and conditions related decisions have ramifications for the eventual toll that the reinsurance market and reinsurance capital providers shoulder.
Meaning the share share of the general insurance industry loss from the wildfires, for the reinsurance market to take, may very well be higher.
But, even at around $35 billion, Fitch Rankings noted today that for the large 4 European reinsurers this may likely only erode about 30% of their 2025 catastrophe budgets.
A $45 billion industry loss, so the top-end of modeller’s current estimates for the wildfires, could eat up about 38% of the large 4 reinsurers catastrophe budgets, Fitch explained.
On the 30% level, our sources suggest, the retrocessional support received could also be relatively limited, outside of proportional risk sharing arrangements, corresponding to retro quota shares and reinsurance sidecars. That goes for the large 4, but additionally more broadly across the worldwide reinsurer landscape, we’re told.
The wildfires are expected to be an event that sees some attritional losses flow through lots of the reinsurance sidecars which might be available in the market right now.
With lots of the sidecar structures retrocessional of their nature, this might grow to be one in every of the larger vectors through which a share of losses flow to the general ILS and alternative reinsurance capital market investor base, from these fires.
As we explained earlier this week, the loss from catastrophe bonds which might be exposed could also be relatively minimal. The mark-to-market write-down of around $200m right now, is not possible to be fully lost. It’s more more likely to be a small proportion of that total.
On the excess-of-loss protection side of retrocession, we’re told this will only selectively attach some lower occurrence layers where there is claimed to be some ILS market, or third-party capital, investor base participation. But overall this will not be currently expected to prove that significant in any respect, unless the industry loss moves towards the upper-end of estimates or higher, bringing more attachment points into play.
Update – Jan twenty third 18:00 GMT: We’ve spoken to quite a few market sources since publishing this text earlier today. There are viewpoints that the proportion of the general industry loss that will probably be shared with reinsurers may prove to be more significant with this event than has been stated thus far. We’re told that the share of losses the worldwide reinsurance market may take may very well be deal more significant than the ten% to fifteen% we referenced to analysts earlier on this piece. Which might naturally mean more retrocession arrangements could come into play, suggesting there could be more in retro XoL loss exposure to the wildfires than we initially assumed. That is something to look at out for because the loss process for this event continues over the following few weeks.
The explanation being that, like across reinsurance contracts, attachments for retrocessional arrangements structured on an excess-of-loss basis have moved higher over the previous couple of years of renewals. While it’s also true that, up until this January 1 when there was a bit more retrocession purchased, many reinsurers have reduced their retro purchases resulting from the rising cost of coverage.
Some major reinsurers have also reduced their cessions due to a desire to retain a greater proportion of the economics generated by their property catastrophe underwriting, while rates-on-line of their inwards business remain at historically higher levels.
Like within the catastrophe bond market, there will probably be some aggregate retro arrangements exposed, but much like the cat bonds we’ve analysed these are expected to only see some erosion of attachment deductibles from the wildfires.
Price stating though that with many aggregate retro arrangements incepting at 1/1, it is a meaningful begin to the 12 months for some, by way of that erosion of buffers sitting beneath their attachments.
Considering back to the last major California wildfire losses, in 2017 and 2018, the retrocession market took the next share of the industry loss than is predicted to be the case with these 2025 wildfires, our sources expect.
That’s to not say there won’t be any excess-of-loss retro exposure. It’s likely there are some arrangements available in the market which can attach. But sources within the broking community now we have spoken with are usually not expecting it to be a very significant source of recovery for the reinsurer community, right now and based on the roughly $30 billion average of loss estimates.
It’s value also noting that in recent reinsurance broker reports they’ve stated that retrocession arrangements went though 2024 largely avoiding any major loss impact, despite the occurrence of great hurricane events Helene and Milton that drove roughly $20 billion in losses each and an overall heavy 12 months for insured catastrophe losses.
All of the above said, now we have heard some market rumours of capital being deployed to retro opportunities where the wildfire peril has been incorporated again for 2025, having been a peril that was not included over the previous couple of years. It’s said these were considered aggregate arrangements though.
That’s perceived as one other feature of the softening and more accommodating marketplace that reinsurers have encountered in recent months.