Wildfire liability, utility balance sheets and the role of reinsurance

Key takeaways

• Wildfire liability has become a balance‑sheet‑level risk for U.S. utilities, not just in California
• Traditional casualty towers are no longer aligned with multi-billion dollar wildfire loss scenarios
• Purpose‑built reinsurance solutions can provide scalable protection that supports financial resilience and rating stability for utilities 

A growing financial challenge for U.S. utilities

Wildfire liability has quietly – but rapidly – evolved into one of the most significant financial risks for U.S. utilities. What was once considered a predominantly California‑specific issue has become a national challenge, directly affecting balance-sheet resilience, access to capital, and in extreme cases, raising concerns around solvency.

This shift reflects a combination of more extreme wildfire behaviour, wider geographic exposure and liability frameworks that increasingly place utilities at the center of post-event claims. Rating agencies, investors and regulators are paying closer attention to how well utilities are protected against low‑frequency, high‑severity wildfire losses.

At the same time, many utilities remain underinsured relative to the scale of exposure now emerging. While casualty insurance remains a critical component of wildfire liability programs, available limits are often calibrated to different risk dynamics. Specialist reinsurance can therefore play an increasingly important role in providing additional, sustainable capacity as wildfire severity continues to evolve. 

We set out below why wildfire liability has become a critical challenge for utilities and how purpose‑built reinsurance can materially expand available protection.

A perfect storm: liability growth, insufficient coverage and rising financial stakes

Across the U.S., a confluence of factors is accelerating wildfire liability risk:

• Wildfire frequency and severity are increasing beyond California. Recent events in Oregon, Colorado, Hawaii and Texas have demonstrated that extreme wildfire behavior is not geographically confined. These events have generated multi-billion-dollar losses, complex litigation and intense public scrutiny – often involving utilities that were historically perceived as lower risk.
• Credit rating agencies are placing greater weight on the adequacy of wildfire protection when assessing utility credit quality. Insufficient coverage is progressively being cited as a factor in negative outlooks or downgrades, underscoring that underinsurance carries direct financial implications.
• Utilities with inadequate protection may face material financial harm. Wildfire‑related liabilities can be volatile and long‑tailed, creating outcomes that strain liquidity, raise borrowing costs or require emergency capital measures. As a result, the resilience of a utility’s insurance program influences how effectively it can withstand severe events without undermining its balance sheet or access to capital.

The new reality: wildfire liability is now a national concern

Utility-caused wildfires outside of California now form part of a sustained national risk pattern – with insured losses reaching into the billions of dollars and utilities linked to a growing share of some of the most severe recent events. 

This shift has clear credit implications for utilities. In a recent credit research paper examining wildfire exposure at U.S. investor-owned utilities, S&P Global Ratings highlighted that wildfire losses can be significantly larger than those typically assumed in base case credit analysis. The growing scale of property damage and related liability claims has contributed to several utility downgrades following wildfire events in 2023 and 2024, and as wildfire conditions continue to deteriorate, S&P sees these contingent risks becoming a standard consideration in utility credit assessments. 

The protection gap: why current towers no longer work

At the same time, the traditional casualty market is showing clear constraints when faced with the scale of wildfire liability now emerging. Aggregate limits below $500m – once considered adequate – are no longer aligned with loss scenarios that, in recent events, have exceeded $1bn. As wildfire risk evolves, this widening gap is raising questions around the resilience of conventional casualty structures.

The gap between available limits and potential exposure has made a dedicated wildfire‑only reinsurance structure more relevant than ever as a means of securing additional, fit-for-purpose capacity. Hiscox Re has been a lead market in wildfire liability reinsurance since 2010, writing over one hundred layers, and supporting cedants through multiple wildfire events across the U.S. 

Coverage is designed to respond to core wildfire-driven liabilities, including third-party property damage and fire suppression costs, while excluding exposures that sit outside a pure wildfire liability framework such as bodily injury, failure to supply, and fines or punitive and exemplary damages.

What’s at stake: ratings pressure, investor scrutiny and solvency risk

The financial consequences of wildfire underinsurance are now becoming clear. Rating agencies have begun to link wildfire exposure to negative outlooks or downgrades, while investors show less tolerance for inadequate protection. In extreme cases, wildfire liability can represent a considerable proportion of net book value, creating sustained financial pressure.

A practical path forward

For utilities, a clearer understanding of wildfire-specific liability exposure is critical. This involves assessing potential loss severity by benchmarking against comparable recent events and re-examining whether existing casualty insurance towers remain aligned with plausible worst-case outcomes.

Brokers play a key role in enabling this transition. Successfully navigating the market requires an understanding of how wildfire liability differs from traditional casualty exposure, including the impact of contract structure and wording on claims outcomes. In this context, reinsurance is best understood as a complementary, strategic extension of the core insurance program.

As wildfire liability intensifies and coverage shortfalls grow, purpose‑built reinsurance offers a practical way for utilities to secure the robust limits now required. With specialist expertise and long-term experience in this class, Hiscox Re is well-positioned to support utilities as they manage this evolving and increasingly material peril.

If you would like to discuss wildfire liability exposures or reinsurance structures appropriate for your utility, please contact our Specialty reinsurance team.