Gallagher Re: California wildfire risk recalibrated for north-south dynamics

California’s wildfire risk profile is undergoing a structural shift that challenges long-held assumptions about where insured losses are likely to emerge, according to Gallagher Re.

Southern California has dominated re/insurers’ thinking for decades as the primary driver of wildfire loss, the broker observed in its analysis, entitled “California Wildfire: Navigating Risk and Finding Opportunity”.

However, Gallagher Re argues that a longer-term view shows Northern California has become an equally important source of loss, driven by a sharp escalation in fire frequency and severity.

“Northern California’s fire frequency and size have escalated dramatically, now splitting the state’s average annual loss (AAL) almost fifty-fifty with Southern California,” said the report.

This rebalancing, does not imply that risk has equalised across the state, according to the broker.

Instead, Gallagher Re stresses that “rebalancing of average annual losses must not be mistaken for an equalization of risk,” warning that averages can obscure the potential for extreme outcomes.

Southern California still concentrates far more value in the highest hazard zones, the intermediary suggested.

The report notes that Southern California has “twice the exposure in high and extreme zones,” with an average maximum loss that is “almost two times costlier than Northern California”.

Climate signals

Gallagher Re frames the January 2025 Los Angeles wildfires as a defining reference point for the re/insurance market’s approach to wildfire as a catastrophe risk peril.

Its analysis “benchmarks the Total Insured Values (TIV) exposed to the fire perimeter of the January 2025 event as a 1-in-35-year return period,” establishing what it describes as “a new, data-driven baseline for the current state of climate and exposure”.

That reassessment is underpinned by what the report repeatedly calls “weather whiplash”.

Wet winters have driven vegetation growth, followed by prolonged dry seasons and powerful Santa Ana winds that strip moisture from fuels and accelerate fire spread.

The consequences persist long after the flames are out.

Gallagher Re highlights that debris flows and mudslides in burn scars have created a “second season” of loss, generating complex “proximate cause” disputes over whether flood damage should be attributed to the covered peril of fire.

Regulation, reform, accumulation

Regulatory reform is reshaping how insurers respond to this evolving risk, Gallagher Re said.

For more than 30 years, Proposition 103 compelled insurers to rely on backward-looking loss averages, preventing the use of catastrophe models in ratemaking.

Gallagher Re says this “systematically underestimated risk in an era of hotter, faster and more destructive fires,” contributing to underwriting losses and widespread non-renewals.

Recent amendments now allow forward-looking models and reinsurance costs to be reflected in rates, Gallagher Re said, in return for a commitment to write business in high-risk areas.

This places renewed emphasis on portfolio-level accumulation management, the broker observed.

“To effectively manage a wildfire portfolio, insurers must consider not only the hazard of an individual location but also the aggregated exposure in the wildfire-prone area, as concentrations of risk disproportionately drive tail risk and increase reinsurance financing costs,” the report said,

Insurers adapting to this more granular, forward-looking view of wildfire risk will be better placed to manage volatility and capital demands than those that do not.

“Insurers will benefit from evolving their frameworks now or risk being outpaced by the peril itself,” the broker added.