Howden Re calls for public-private collaboration to bridge California’s protection gap

Following the California wildfires, Howden Re, the global reinsurance, capital markets, and strategic advisory arm of Howden, has released a protection gap-focused report emphasising regulatory reforms, risk-based pricing, enhanced risk mitigation, and public-private collaboration as the “only viable path” to restoring stability in the state’s insurance market.

As per the report, the recent catastrophic wildfires, combined with a California regulatory environment that restricts risk-based pricing and stifles supply and competition, have driven several major insurers to withdraw from the market.

“California’s regulatory environment has limited insurers’ ability to accurately price wildfire risk,” Howden Re explained.

The firm’s report continued, “For years, restrictions on risk-based pricing have made it unprofitable for admitted-market insurers to provide coverage in fire-prone areas, leading to mass policy cancellations, reduced underwriting capacity, and an over-reliance on the state’s insurer of last resort, the FAIR Plan.”

“This has left homeowners and businesses with limited or no options for coverage, presenting a substantial yet avoidable financial risk to the state.”

As Reinsurance News has extensively covered, modelled insured loss projections for the recent LA wildfires vary. The highest loss estimate came from CoreLogic, which projected insured losses between $35 billion and $45 billion, while the CEO of a large Bermudian reinsurer warned of industry losses as high as $50 billion.

However, total damages and economic losses are expected by some to exceed $250 billion, underscoring the significant protection gap (disparity between insured and economic losses post-event).

With this in mind, Howden Re’s research suggested that a $6 billion investment in wildfire risk mitigation could have reduced the economic losses of the LA wildfires by nearly 50%.

Tim Ronda, CEO of Howden Re, commented, “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.”

Looking ahead, Howden Re’s report highlighted new regulations introduced in late 2024 in California that grant private insurers greater pricing flexibility by allowing the use of catastrophe modelling and incorporating reinsurance costs.

The firm noted that these measures represent important initial steps in addressing structural challenges and encouraging capacity to return to the market.

Howden Re also outlined several critical actions needed to attract capital and restore confidence in California’s insurance market, including the aforementioned expansion of public-private partnerships, incentivising risk mitigation, and development of innovative insurance solutions.

Reinsurance and capital markets are reportedly “essential partners” in 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. There is an opportunity for them to play an even bigger role, given that their participation is currently triggered at the upper end of projected loss ranges for the LA wildfire.” Howden Re’s report said.

Howden Re’s report observed that the reinsurance market will assume a bigger portion of insured losses relative to previous wildfire events in California.

“Impacts on reinsurers will be influenced by how the loss event is defined. Common language in reinsurance contracts allows for the number of events to be determined based on losses occurring within a set distance (150–250 miles) and time period (7–10 days). Ultimately, each situation will vary in whether it makes the most sense for stakeholders to consider these fires as one or separate events,” the firm added.

Tim Ronda continued, “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.”

Julian Alovisi, Head of Research at Howden, said, “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.”

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