Should Upcoming California Commissioner’s Hearing on Wildfires Concern Insurers?

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Insurance Commissioner Ricardo Lara will convene a “virtual investigatory hearing” on Monday to initiate a series of regulatory actions that will protect residents from the increasing risk of wildfires.

Several years of destructive wildfires have made insurance expensive and difficult to find for many Californians, particularly those living in high wildfire risk areas of the state, prompting Lara’s actions, which he said, will be aimed at helping stabilize the insurance market while protecting lives and homes, reducing catastrophic wildfire losses, and increasing transparency for consumers.

Those are all admirable goals, but some worry there’s another side of the equation that we aren’t all keeping in mind.

Jerry Sullivan has been through several hard insurance markets.

Sullivan, chairman of G.J. Sullivan Co., Reinsurance, in Los Angeles, and a pioneer of the state’s surplus lines market, believes that with the rioting and recent civil unrest, COVID 19, and now the wildfires, the insured losses carriers will be paying out will be big.

“This stuff is really piling up and we are in the throes of a really tight market and it’s going to get a hell of a lot tighter when this thing’s is over,” Sullivan said.

Sullivan got into the insurance game around the time of Hurricane Betsy, a storm that hit Florida in August 1965, causing $1.42 billion in damage in 1965 USD.

“We never had anticipated that kind of a loss,” he said.

That helped lead to what was supposedly one of tightest markets the industry ever had.

“I’ve gone through six other tight markets,” Sullivan said. “This is going to be tighter than any of them, by a significant margin.”

Sullivan wants to see people helped, but he worries that the steps being proposed by the commissioner could further reduce insurance capacity and the industry’s appetite for covering an increasingly risky state.

The year is far from over and we have a ways to go with the pandemic and the ongoing wildfires, he said, adding, “These fires are dramatic.”

Nearly 9,000 firefighters remain on the frontlines of 21 wildfires across the state, 12 of which remain major incidents, according to CalFire. Firefighters across California responded to 29 new wildfires on Thursday.

A red flag warning remains in effect through in much of Northern California, as well as the mountain regions of Southern California.

Since the beginning of the year, 8,500 wildfires have burned well over 4.1 million acres in California. The total number of fatalities to date from the wildfires is 31 and more than 9,200 structures have been destroyed, according to CalFire.

Lara said he plans to use his authority as commissioner in four areas: Pushing for incentives for mitigation; establishing statewide standards for hardened homes; creating fire risk scores that are transparent; requiring insurers to seek adequate and justifiable rates to protect the solvency of the market.

“With climate change fueling California’s devastating fires, I am taking action to bring down the risk of losing your home in a wildfire and losing your insurance to a non-renewal. Californians need to know they can get and keep insurance they can afford before they buy, sell, or build a home,” Lara said in a statement. “I will use my authority under California law and Proposition 103 to protect consumers and the future of a sustainable insurance market in our state.”

Those wishing to participate in the hearing can email an RSVP to CDIRegulations@insurance.ca.gov. That email is also where written comments, supporting documents and materials can be submitted.

The commissioner has a lot of authority and can have a say on rates, but if insurers begin to suffer enough financial harm, many of them may not be able to continue to write insurance in the state, Sullivan warned.

“All of these various factors are beginning to come into play,” Sullivan said.

The state already looks a bit risky for insurers.

A recent report shows nearly 2 million homes, mostly in the Western U.S., with a rebuilding value of more than $638 billion are at an elevated risk of wildfire damage.

The annual wildfire report from data provider CoreLogic looked at the risk in 15 wildfire-prone states. California is home to 76% of the residences on the top 10 list, however but the reconstruction cost value of the homes comprise nearly 84% of the list.

The CoreLogic report shows the Los Angeles metro area tops the list of metropolitan areas with the greatest single-family residences at wildfire risk, with 154,462 homes with a reconstruction value of $90.31 billion. That’s followed by the Riverside (126,628 homes) and San Diego (98,970 homes) metro areas. The other California cities atop the list were Sacramento, San Francisco and Truckee.

Private carriers have been dropping coverage or refusing to underwrite in wildfire-prone areas. That’s forcing more people onto the FAIR Plan, a decades-old program in California meant to be a last resort for people who can’t get insurance from carriers such as Allstate Corp. and State Farm Mutual Automobile Insurance Co.

Lara had been trying to compel the FAIR Plan to offer comprehensive policies to homeowners who lost their property insurance because of the threat of wildfires. But a judge ruled in late February the FAIR plan can’t be required to provide coverage for other hazards such as flooding or theft, a judge ruled in late February.

The American Property Casualty Insurance Association and Lara have been at odds about making homeowners insurance more available in wildfire prone areas.

The group backed Assembly Bill 2167 would have established the Insurance Market Action Plan program, or IMAP program, under which residential property insurance policies in a county may qualify for IMAP protection.

Supporters said the bill said would have provided homeowners in wildfire zones access to more choice and competition among insurers based on price and coverage while avoiding costly and more limited FAIR Plan coverage. Lara called the bill an “insurance industry wish list, with nothing to help consumers,” said it was an attack on insurance consumer protection law Proposition 103.

Several big wildfire bills to address these issues were left on the table when the California Legislature ended its session in late August.

Another area that appears to be taking on some extra risk is the surplus lines market.

The trend has been that premiums have continued to increase and more homeowners have been forced into the surplus market. But in the first half of 2020, transactions decreased, according to the Surplus Line Association of California.

Looking at the first six months of 2020, there were 16,833 homeowners transactions (new business and renewals) in the California surplus lines marketplace, for a total of $126 million in premiums. That represented 6.2% of all surplus lines transactions in California and 2.7% of all surplus lines premiums in California.

Following are the figures for the previous five years (January 1-June 30):

2019: 27,189 transactions, $108 million in premiums; 10.3% of all transactions, 2.5% of all premiums.
2018: 25,123 transactions, $72 million in premiums; 9.6% of all transactions, 2.1% of all premiums.
2017: 22,968 transactions, $63 million in premiums; 9.5% of all transactions, 2.0% of all premiums.
2016: 20,061 transactions, $59 million in premiums; 8.8% of all transactions; 2.0% of all premiums.
2015: 18,368 transactions, $53 million in premiums; 8.8% of all transactions; 1.8% of all premiums.

That increase in the surplus lines volume is demonstrating that the surplus line market is alive and well and doing exactly what it’s supposed to be doing.