California Wildfires

Property Insurance and California Wildfires

By: Michael A. Pallas

2018 California Wildfires

2018 was a very challenging year for California wildfires. We saw 8,527 fires that scorched over 1,800,000 acres, causing roughly $3.5 billion in loss to property owners and fire support. The largest of these fires were the Carr fire, Mendocino Complex Fire, Woolsey Fire, and the Camp Fire.  The discipline, underwriting sophistication, and claims handling of property insurance carriers has never been more important.

Brush Mapping

Each insurance carrier has their own philosophy when it comes to selecting risk. A common measurement for wildfire risk is know as brush mapping. Usually via a vendor such as Riskmeter or Veririsk’s Fireline, carriers are able to use 3rd risk modeling to help determine their level of comfort when it comes to wildfire risk. These tools paired with underwriting research, actuarial discipline, and a little bit of luck contribute to a carrier’s profitability.

Models Don't Always Work

Third party risk modeling can be great, especially when it is based on a solid set of data. But, when events occur outside of the models, insurance carriers can be left high and dry. Take Merced Mutual as an example. Their concentration of risk along with risk modeling was inadequate, which resulted in the company being seized by California regulators shortly after the Camp Fire claims started to pour in. These outlier events are causing California insurance carriers to adjust their strategy, and it is already happening.

A Shift In The Market

Over the past month we have taken several meetings with our carrier partners in California. The companies that had a more aggressive approach on brush and wildfire risk are pulling back dramatically, meaning that there will be fewer choices for the consumer in areas that have a moderate to high perceived brush fire risk. The carriers that had a more disciplined approach seem to also have changes on the horizon, although they should be less drastic as they positioned themselves well before the 2018 California Wildfire season.

What This Means for Insurance Brokers

It’s certainly not set in stone, but the writing on the wall is that there are going to be massive changes in the California residential property insurance marketplace.  California wildfire losses to insurers are approaching record levels and low interest rates continue to cut into the profitability of major insurance carriers. My guess is that many carriers will greatly reduce their appetite, and become much more conservative as it relates to fire risk. Insurance brokers will be left with fewer choices, and will need to explore specialty carriers as they move in to seize the new opportunity.

What This Means For The Consumer

California can move slowly when it comes to rate changes, but as mentioned above carriers are already reducing their appetite. This means that consumers will have fewer choices, and ultimately higher rates as specialty carriers will take market share that is no longer sought out by traditional markets. More than ever it is important to work with a knowledgeable broker that represents reputable insurance carriers. It is the job of brokers to navigate the insurance marketplace on your behalf and to find you the product that meets at the intersection of coverage and cost. Unlike captive agents (think Farmers, State Farm & Allstate) brokers work on your behalf, not the insurance company. In addition, brokers offer greater flexibility to shift away from carriers when they tighten their underwriting guidelines, reduce coverage options, or increase rates.

Overall the sky isn’t falling, but the market is shifting. Be prepared, take responsibility, and work with an insurance broker who has your best interest at heart.

Sources

  • Cal Fire: http://cdfdata.fire.ca.gov/incidents/incidents_stats?year=2018
  • businessinsurance.com – https://www.businessinsurance.com/article/20181114/NEWS06/912325145/Insured-losses-from-California-wildfires-nearing-record-levels-AM-Best
  • NAIC – https://www.naic.org/cipr_topics/topic_low_interest_rates.htm

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