In California, the number of acres burned per wildfire and structures damaged per acre have increased since 2013. Relentless years of devastating wildfires are stretching the California homeowners insurance industry to its limits with losses of $37 billion outstripping premiums of $32 billion since 2016.
Faced with the inability to recover all the costs of insuring California wildfires, the California admitted insurance market has been reducing its wildfire exposure. Stricter underwriting eligibility guidelines and higher rates for wildfire-exposed properties have pushed more policyholders into secondary markets, such as the California Fair Access to Insurance Requirements (FAIR) Plan. The FAIR Plan is design to accept properties that are having difficulty in finding insurance in the market and does not decline risks due to wildfire exposure.
To better understand its exposure to wildfire, the FAIR Plan asked Zesty.ai, Inc., a company that provides a wildfire risk score model, to score the FAIR Plan properties relative to wildfire risk. To read more about the FAIR Plan and Zesty.ai’s risk score model, read this paper by Milliman’s Annie Shen, Sheri Scott, and Katherine Dalis. It is the second in a series of articles examining California wildfire risk and tools that could be used to identify, quantify, and mitigate this risk.
As the 2020 wildfire season again exceeds historical norms, insurers and policymakers must turn their attention from the literal fires to the figurative one: the threat—and increasing likelihood—that this escalating wildfire risk will result in a homeowners insurance crisis in the state of California.
For homeowners, insurance is often the last line of defense against losing everything to wildfire. However, for many, this crucial financial backstop is rapidly becoming harder to obtain as insurers reduce their portfolios due to billions in losses and regulatory restrictions on reflecting the true cost of risk in the premiums charged. This withdrawal is creating an untenable situation for many Californians and efforts to address it are becoming an urgent priority for policy makers.
In this article, Milliman professionals explain in more detail the state of home insurance in California and the regulatory efforts to address the issues thus far.
Reinsurance helps insurers respond financially to large
catastrophes like a wildfire or earthquake. Insurers share a portion of the
premium with reinsurers to rent capital and reduce the burden of a major event
involving multiple policyholders.
In California, regulations allow reinsurance costs for earthquakes
to be included in insurance rates but not for wildfires or other catastrophes.
This penalizes insurance companies that spread the risk of major wildfires, and
results in bottom-line loss and expense outstripping premium over the long
term. This, and other issues, are making it more complicated for homeowners in
the state to find insurance with wildfire protection in the voluntary market.
How can insurance be restructured to solve the wildfire insurance availability issue in California? Milliman consultant Sheri Scott discusses some options in her article “Reshaping insurance to solve California’s wildfire insurance availability issue.”
As a new wildfire season in California is ablaze, answers to
questions about insurers’ pricing, underwriting, and exposure management
functions resulting from the 2017 and 2018 seasons are still taking shape.
According to Milliman estimates, the 2017 wildfire season alone wiped out just
over 10 years of underwriting profits for California homeowners insurers. Moreover,
the combined 2017 and 2018 wildfire seasons wiped out about twice the combined
underwriting profits for the past 26 years, leaving the insurance industry with
an aggregate underwriting loss of over $10 billion for the California homeowners
line of business since 1991.
A historically profitable line of business has recently
become an unprofitable line exposed to a severe peril that is neither easily
measured nor fully understood. As a result, wildfire risk has become a key
focus of Californians, and their property insurers.
Catastrophe simulation models, or “CAT models,” have been
developed for a variety of catastrophic perils, such as hurricanes, floods,
winter storms, earthquakes, and wildfires, to provide insurers with scientific
techniques to quantify and assess their exposure to catastrophic risk. Recognizing
the growing importance of this peril, a number of firms have been working to
apply the latest techniques in catastrophe modeling to wildfires.
In their article “Wildfire catastrophe models could spark the changes California needs,” Milliman’s Eric Xu, Cody Webb, and David D. Evans explain how enhanced quantification and understanding of wildfire risk represents one of the most important challenges for property insurers writing business in the Western United States, and how innovations in the field of catastrophe modeling may assist them with this task.
When a 6.4 moment magnitude (Mw) earthquake struck Ridgecrest, California, in early July, followed closely by a 7.1 Mw event, many in the state worried it was the “Big One.” But while it was the most powerful California earthquake since 1999, and only the fourth exceeding 7 Mw in the past 40 years in California, Ridgecrest occurred in sparsely populated Kern County and won’t rival the state’s most destructive earthquakes.
As Milliman actuaries David Evans, Eric Xu, and Cody Webb write in their recent article, while not the “Big One,” the Ridgecrest event may prompt Californians to consider their exposure to this peril. Coverage for earthquakes isn’t provided by homeowners policies in California and insurance participation across the state is low, especially in some of the state’s riskiest areas—as this infographic depicts.
On July 4, a 6.4 moment magnitude (Mw) earthquake struck Ridgecrest, California. It was followed closely by a 7.1 Mw event and over 8,900 aftershocks as of July 12. This earthquake was the most powerful earthquake in California since 1999, and was only the fourth exceeding 7 Mw in the past 40 years in California. Based on early estimates, expected economic damages from Ridgecrest are at least $1 billion.
Earthquake kits and structural retrofits provide invaluable protection to Californians, but there’s another that most lack—insurance. Coverage for earthquakes isn’t provided by homeowners policies in California, and the lack of it poses a risk to the largest assets of many state residents: their homes. Only 10% of residential units in the state have earthquake insurance, despite the fact that many residents live in areas with earthquake risk higher than the Ridgecrest area.
To learn more about earthquake insurance in California and the susceptibility of residents to earthquake, see this article by Milliman’s David Evans, Eric Xu, and Cody Webb.