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.
To begin to address climate risk effectively, governments, insurers, banks and asset managers, infrastructure experts, and technical assistance and research firms need to be enlisted to work together. Addressing climate change adaptation to reduce risk before disasters hit is the best chance to improve the outcomes of climate risk events.
This is especially true for low-income and small island nations. For many of these nations, resilience efforts are simply out of reach. Insurance may mitigate some of the costs for citizens, but it is of limited benefit in adaptation. The bond markets focus on short durations. And it can be difficult for small countries to obtain even basic infrastructure financing.
Climate adaptation requires significant financing. Basic asset-liability management says that long-term projects should be matched with long-term investments while mitigating long-term risks—like climate change. Linking insurance directly to long-term climate adaptation bonds can help governments more effectively adapt to and manage the effects of climate change.
This article by Milliman’s Michael McCord of the MicroInsurance Centre at Milliman and Abhisheik Dhawan of the UN Capital Development Fund says that coming together to address climate change risks should begin before disaster strikes.
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.
Flood was a peril once thought to be uninsurable by the private insurance market. Today, the sector is poised to grow rapidly. Milliman consultants Nancy Watkins and Dave Evans are optimistic that private insurers will significantly close the U.S. flood “protection gap” in a few years by routinely offering flood coverage alongside most homeowners policies. In a recent Carrier Management article they authored, the consultants discussed trends in the private flood market leading to this prediction, and outlined several obstacles the market will need to overcome along the way.
To learn more about what flood insurance for U.S. homeowners could look like in a couple of decades, listen to the Critical Point episode entitled “The future of flood insurance.”
The visibility of climate change’s impact on property hazard is increasingly leading individuals and their chosen leaders to ask: how might an increase in hazard affect the desirability of living in various communities and how do we manage the socioeconomic effects? Recent stories have highlighted the concerns of “climate gentrification,” or potential migration from low-lying but relatively well-off areas to areas of higher elevation but sometimes higher poverty.
Milliman has worked with Jupiter Intelligence, a climate risk analytics provider of forward-looking and probabilistic hazard data for future conditions, to develop a framework for analysis that may spark insight for community leaders in the public and private sectors who are charged with managing climate change and planning for a resilient future. This paper by Molly Barth and John Rollins investigates insurance risk, consumer costs, and resilience incentives under the stress of a changing climate in Broward and Miami-Dade counties.