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.
As recovery and investigative crews continue to comb through the wreckage of California’s Camp Fire and homeowners set their sights on moving forward, public attention has turned to the insurance implications of such a destructive few years of wildfires in the state.
November’s Camp Fire in northern California has already topped the Tubbs Fire of 2017 as the most destructive wildfire in California history. And in July, the Mendocino Complex Fire burned through more land than any other wildfire in state history, at 459,123 acres.
Calendar year 2017 was an unprecedented time for wildfires in California. According to Milliman’s estimates, losses incurred by insurance companies in the 2017 wildfire season could rival the combined losses of the entire 39-year period that preceded it.
Despite the high level of wildfire destruction in the state over the past two years, it is not clear what Californians should expect in the future. Without question, though, the recent wildfire destruction has had a devastating effect on individuals and businesses across the state, and has also had a major impact on property insurers. Due to an extraordinary outbreak of major wildfires in the fourth quarter of 2017, insurers suffered wildfire losses of $12 billion in calendar year 2017—the largest amount of losses on record since the 1991 Oakland Hills Firestorm, which would have cost $2.8 billion in 2017 dollars.
If the recent pattern of California’s escalated wildfire severity persists, there could be significant implications for insurers’ willingness to adequately cover the wildfire losses in the state as well as for homeowners’ ability to find and afford coverage.
In this article, Milliman’s Cody Webb and Eric Xu examine some of the fundamentals of wildfire risk, including the effect on insurers, homeowners, and the overall implications for the property insurance market in California.
California’s Medical Injury Compensation Reform Act (MICRA) has been the blueprint used by states to reform their medical professional liability (MPL) markets since its enactment in 1976. In part, the landmark legislation helps reduce MPL premiums and increase the availability of coverage for physicians by capping noneconomic damages at $250,000.
A pending ballot initiative in California now aims to increase the cap. In this Best’s Review article by Milliman’s Susan Forray and Stephen Koca, the consultants examine the financial effects an increased cap can have on the state’s MPL industry. They also consider how other states with similar tort reforms may come into the crosshairs.
Here is an excerpt:
Three dozen states have adopted some form of a cap on damages over the years, although in 12 of these states the cap has been overturned or otherwise invalidated, and remains overturned in most of these cases. And while these caps are often less effective than California’s, either because of higher limits or exceptions, they followed MICRA’s lead and reduced costs in many MPL markets.
Texas is perhaps the best example of a state whose MPL premium has been reduced by the effects of a cap on noneconomic damages. MPL premiums in Texas had been in close step with national trends until 2003, the year reforms were enacted in the state. Premiums declined relative to national levels a year after reforms were enacted, and continued to moderate for several years.
While nationwide premium per physician is approximately 25% less than in 2003, MPL premiums in Texas have fallen by more than 60% since that time—a clear demonstration of the impact that reforms have had on the MPL costs in the state, and a warning sign of potential increases that could be seen in California if the cap is increased.
For more perspective on the impact a higher cap would have on MPL claims, read Stephen’s article “The end of an era for noneconomic caps?”
The issues that hospitals and other facilities are facing today are more complex and continuously changing. The risks of providing medical care and the costs of protecting against those risks alone, including the protection of employees from injury or illness in the delivery of that care, require hospitals to look closely at questions related to taking fully insured, partially self-funded, or self-insured positions. As these facilities are well aware, workers’ compensation laws in California make the choice increasingly complex—and important.
Keenan Healthcare and Milliman present the results of the first annual California Hospital Workers’ Compensation and Payroll Benchmarking Survey. This survey and report aim to provide industry-wide benchmarks in terms of the fundamentals from which informed decisions related to workers’ compensation and maintaining appropriate risk can be made: claim frequency and severity, medical and indemnity costs, the allocated loss adjustment expense (ALAE), and the impact of specific factors such as age, occupation, and more.