How Insurance Industry Might React to ‘New Normal’ of California’s Historic Wildfires

By | November 13, 2018

The “new normal” for California has yielded another year of record wildfires and billions of dollars in insured losses. Homeowners insurance rates inch up in high risk areas, and carriers get more cautious about where they write in a state that has been made more vulnerable by years of generally higher temperatures and less rainfall.

State regulators and lawmakers stepped in with new consumer protections after last year’s record blazes, and may do so again.

An early analysis from Moody’s issued on Monday shows that losses from the ongoing fires in Northern and Southern California could be around $6.8 billion. The wildfires that hit late last year had an estimated $12.5 billion in insured losses.

However, the fires are far from done doing their damage.

A member of the Sacramento County Coroner’s office looks for human remains in the rubble of a house burned at the Camp Fire, Monday, Nov. 12, 2018, in Paradise, Calif. (AP Photo/John Locher)

The Camp Fire in Butte County had burned 125,000 acres and was only 30 percent contained as of Tuesday afternoon. The fire resulted in 42 deaths, and had destroyed 6,522 residences and 260 commercial properties. It’s considered the deadliest wildfire in history, and it threatens another 15,500 properties, according to CalFire.

In the southern portion of the state the Woolsey Fire in Ventura County had burned 96,314 acres and was 35 percent contained. It destroyed an estimated 425 structures, and it threatens 57,000 other structures. It has resulted in two deaths.

The causes of both fires are under investigation.

November has been a bad month for California. The fires now raging followed other fires that began breaking out in November. The Hill Fire in Ventura County has burned 4,531 acres and is 90 percent contained. The Nurse Fire in Solano County has burned 1,500 acres and is 90 percent contained.

“2018’s going to be another multibillion-dollar season,” said Chris Folkman, senior director at catastrophe modeler RMS.

Folkman believes the back-to-back severe wildfire seasons will make insurers even more cautious about writing in California’s higher risk areas, particularly around the wildland urban interface, and he thinks the nature of underwriting in wildfire prone areas will change dramatically.

“The underwriting process historically has relied on static maps or scoring tools where individual properties are grouped into zones, high risk vs. low risk, and based on historical data, historical losses,” he said. “I think the issue with that, as we’re seeing, is the history of wildfire is not going to be the future of it.”

He believes that wildfires will be treated like other perils, such as hurricane, flood, and earthquake, in which computer simulations will be ran for numerous events under a variety of climate scenarios to get a better risk picture.

The climate scenarios he mentioned are a key part of the “new normal” phrase that has been tossed around the last few years by experts looking for ties between these increasingly severe wildfire seasons for California.

A.M. Best issued a briefing on Tuesday that addresses the “new normal” and how insurers are expected to fare from the ongoing fires.

“Urbanization and growing population density in heavily wooded areas, as well as hotter, drier conditions resulting from rising temperatures and declining precipitation, are contributing to wildfires becoming an increasingly frequent peril for insurers and citizens of California,” the briefing states. “As this year has progressed, so have the wildfires that continue to engulf numerous areas of the state.”

A.M. Best expects that 2018 losses will be at record levels for California, as the potential for historic losses was already likely before the Woolsey fire hit the wealthier area of Malibu, where the median home value is $2.9 million.

Each of the last two years has had a greater number of fires than the running five-year average, and the total number of acres burned in 2018 is already at 2.5 times the five-year average according to CalFire.

“For homeowners and farmowners writers in California, direct losses incurred increased nearly four times in 2017, to $16.0 billion, compared to $4.2 billion in 2016,” A.M. Best stated. “Much of the increase can be attributed to the 2017 fire season.”

The 10 largest premium writers in California posted a direct loss and adjustment expense ratio in 2017 that was on average 3.7 times higher than in 2016, however most large writers in California are large national carriers with adequate risk-adjusted capital, according to A.M. Best.

“The catastrophe events of 2018 will likely cause significant earnings volatility and could stress some balance sheets,” A.M. Best stated. “Insurers have responded to a certain extent to the wildfires of 2017, but the lessons learned from the 2018 events will again call for re-evaluation of their underwriting and risk management strategies.”

Martha Bane, a senior vice president at global insurance broker Arthur J. Gallagher, doesn’t expect dramatic changes like market withdrawals and noticeable rate hikes across the board, but she does expect changes in the market. And those changes have already been occurring.

“In general, we have been seeing slight rate increases as a result of what happened last year,” Bane said, adding that “insurers may consider the overall amount of exposure they have.”

In other words, they’re doing what they should be doing when risks change, as is the case in California where, many argue, a changing global climate has increased temperatures and reduced rainfall to exacerbate the wildfire hazard.

“I think what’s concerning is they’re becoming more frequent,” she said of the wildfires. “We can’t really deny that climate change has a big part in the frequency and severity of these wildfires.”

Folkman believes more laws and regulations are another possible reaction to the fires.

“It think there are going to be some interesting conversations between the insurance community and the regulatory community,” he said.

He believes these conversations could include what insurance needs to look like in high risk areas, what kind of data is being collected and how risk is to be measured.

Among those conversations could also be an examination of building codes, and discussions on how safe some of these homes are that are going up in the wildland urban interface.

The number of homes built in these areas rose from 30.8 in 1990 to 43.4 million in 2010, making it the fastest growing land use type in the U.S., according to a recent study that examines growth in the wildland urban interface.

“I think if there is a sliver lining to all these devastating events, I think there will be a focus on creating more resiliency, on safer construction and mitigation,” Folkman said.

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