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.
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.