Despite recent efforts to reform the National Flood Insurance Program (NFIP), most U.S. homeowners do not carry insurance to protect their properties against the risk of flooding. For most homeowners, the purchase of this coverage is mandatory only if they live in certain specified high-risk areas. However, significant risk exists in areas where the purchase of flood insurance is rare. Even in areas where flood coverage is required, data from the NFIP and private flood insurers do not indicate high degrees of coverage.
Beyond direct damages to property and communities, the flood insurance protection gap could have many downstream financial impacts. Homeowners insurance is integral to protecting the collateral that underpins the U.S. mortgage system. As a result, coverage gaps could create adverse financial exposure to bearers of mortgage risk including mortgagees, insurers, reinsurers, federal underwriting agencies, and bondholders.
In a new Society of Actuaries report, professionals from Milliman and catastrophe modeling firm KatRisk examine the countrywide residential exposure to flooding and downstream implications including its impact on mortgage default risk. They also consider how flooding may be affected by rising sea levels and evaluate how it could affect the financial health of residential householders.
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.
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.