By Henry Gale

Feb 12 - (The Insurer) - Mercury General has revealed that its catastrophe reinsurance program includes a small parametric component on which it does not expect to make any recovery in relation to the recent California wildfires.

Mercury General reported in its Q4 2024 results on Tuesday that it estimates gross losses of between $1.6 billion and $2.0 billion from the wildfires

Its catastrophe reinsurance program provides $1.29 billion of limits on a per-occurrence basis after covered catastrophe losses exceed the $150 million retention.

One percent of the limit of its $650 million (excess $650 million) coverage layer was placed as parametric coverage. That $6.5m million cover pays out based on the intersection of the fires' footprints with a grid, where each cell has an assigned loss value.

Specifically, Mercury General says its parametric cover relies on industry insured values in pre-determined grid cells and the company's participation percentage within each cell.

While the company did not reveal any more details of the structure of its parametric cover, other parametric wildfire reinsurance deals are known to use grids where each cell is one square kilometre in size.

The total loss is then calculated as the sum of the pre-assigned loss values in each grid cell that the wildfire breached. Publicly available data sources such as the National Interagency Fire Center are used to determine the fire footprint. A traditional structure such as excess of loss can then be applied to determine the recovery.

The news that this portion of Mercury General's reinsurance will not be eligible for recovery implies that the total loss value calculated under its parametric cover did not exceed $650mn, even if both the Palisades and Eaton fires are treated as a single event.

Without more details of the company's parametric contract, it is not clear what has caused the discrepancy between Mercury General's estimated gross losses from these events ($1.6 billion to $2.0 billion) and the loss value calculated under its parametric cover ($650 million or less).

It could be that the insurer chose to cover only certain locations within California with parametric reinsurance. If the fires affected areas other than the grid cells specified in its contract, the parametric loss value would not reflect the insurer's total loss.

Alternatively, the information used regarding the total insured value or Mercury General's participation percentage in each grid cell might not match the figures the insurer used to estimate its total losses.