The insurance sector is facing a financial blow after the devastating wildfires in Los Angeles, and much of that cost will be shouldered by Bermuda-based reinsurers, who provide a major share of the global coverage for US natural catastrophes.

The fires in Palisades and Eaton, driven by extreme Santa Ana winds in January, destroyed hundreds of homes and left a wide swath of damage across southern California. Insured losses are now estimated at $28 billion.

The scale of the fires has triggered a fresh reckoning on how wildfire risk is modelled and priced. Karen Clark, head of catastrophe modelling firm Karen Clark & Company, has released a white paper arguing that wildfire losses, while rising, can still be insured profitably if the risks are priced correctly.

“There’s no such thing as a bad risk ― there’s only a bad price," the paper states.

To those ends, the KCC wildfire model uses detailed, high-resolution data on wind speed, terrain, moisture and vegetation to map out how a fire could spread and what kind of damage it might cause.

It is updated regularly with the latest climate data, including trends in vapour pressure deficit, which is a measure of how dry the air is and which is closely tied to fire risk.

According to KCC, the model “accurately predicted the loss from the Palisades and Eaton fires in real time while they were occurring and, more importantly, years before they happened.”

The idea is to give insurers and reinsurers a clearer picture of potential losses, so they can price the risk more accurately.

Ms Clark has called for the need for faster evolution in the tools used by reinsurers.

She told The Royal Gazette in 2022: "As a catastrophe modelling industry, we need to be on top of not just what’s happening with property exposures, but what’s happening with the climate."

Analysts at Fitch Ratings expect the LA wildfires to account for around 60 per cent of total insured catastrophe losses for the first quarter of 2025.

While that’s likely to dent quarterly profits, Fitch added that the industry’s capital reserves remain strong and should prevent any rating downgrades.

“The growing prominence of non-peak perils in 2024 underscores a shifting risk landscape,” the report stated. “As risks escalate and economic losses increase, there is heightened pressure to address the natural catastrophe protection gap.”