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Insurance
Year-Round Wildfires Are The ‘New Normal’: California Insurance Regulator

Highlights

Hailey Ross contributed to this article.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

Dec. 05 2018 — Wildfires will continue to plague the state if climate change is not brought under control.

  • Health insurance markets 'in turmoil' as a result of Trump administration actions.
  • Monitoring impact on California insurer of last resort in the wake of the latest devastating wildfires.

California Insurance Commissioner Dave Jones has less than two months before his tenure comes to a close. Jones is hopeful that the Golden State's next top insurance regulator, as yet undetermined following a tight election, will continue some of his policy initiatives, such as climate risk insurance and cannabis insurance.

S&P Global Market Intelligence caught up with Jones at the National Association of Insurance Commissioners' fall meeting in San Francisco to talk about his time in office and what's next for the state and for himself. The following is an edited transcript of that conversation.


Dave Jones, California insurance commissioner
Source: California Department of Insurance

S&P Global Market Intelligence: Is there a fear that insurers might leave California because the risk is too high or jack up the rates? What does the future landscape look like?

Dave Jones: So just to put it all in perspective, we have about 8 million single-family properties in California [and] about 3 million are in the so-called Wildland Urban Interface Counties. Those are counties which are heavily forested or have a lot of brush or grasslands. Of the 3 million ... about a million have already been rated by the insurers as "higher" or "very high" risk. For those that can't find [insurance] because the insurers have concluded their home is too risky to write, we have an insurer of last resort called the FAIR plan, which was set up by the legislature some 50 years ago to write fire insurance anywhere in California regardless of the risk.

There are roughly 38,000 FAIR plan policies in the Wildland Urban Interface versus 3 million homes in that area. So I'm watching closely the FAIR plan policy prescription levels to make sure that if we see some dramatic increase in take-up of those policies that we understand what's going on. What that would tell us if that were to happen is that people are having an even greater challenge finding admitted or surplus lines insurers. Right now there's no question that some people in some of these areas are facing a challenge.

What have you done to ensure those homeowners can overcome those challenges?

Jones: We did a wildfire insurance availability report that we released earlier this year that lays out the best available information about the acuity of that challenge. We saw a 15.3% increase in nonrenewals between 2015 and 2016 in the Wildland Urban Interface areas. That doesn't mean that 15.3% of the people living in those areas didn't get insurance; it just means they weren't renewed by their existing carrier and then had to go somewhere else. Most of them did go somewhere else and found either admitted or surplus lines insurance, but so far we've only seen an increase in the FAIR plan policies year to year of a couple thousand.

Are wildfires the new normal in California?

A firefighter battles flames along the Ronald Reagan Freeway in Simi Valley, Calif.
Source: Associated Press

Jones: It's getting worse. We're not in a crisis yet, but all of the trends are in a bad direction. And what the climate scientists tell us is that the federal government of the United States is not doing enough, fast enough, to reduce greenhouse gas emissions. And greenhouse gas emissions aren't being reduced globally fast enough. So as a consequence we're going to continue to see increases in global temperature and that means increases in temperature in California. That means reduced snow and precipitation. That means drier conditions, longer droughts, and that contributes then to wildfire, along with other impacts as well, sea level rise and hurricanes.

So what we anticipate here in California is that this is the new normal — that we no longer have a fire season, we have a year-round fire season.

I don't think there will be some tipping point, but I think things will continue to get worse. It's going to be like a frog in the pot as the temperature gets turned up and we boil. A world in which the temperature goes up an additional 3 degrees or 4 degrees Celsius is likely an uninsurable world, and ... the biggest threat that climate change [presents] to insurance markets and consumers is that at some point the risk of these catastrophes which are driven or contributed to by climate change become so severe that insurers conclude they can't afford to write insurance for it.

Now that hasn't happened yet in California, but you can see the trend moving in that direction based on what we know to be the case, which is the federal government or the Trump administration is not only not fighting climate change but it's reversed a bunch of policies of the prior administration. So the temperature is going to continue to rise and we're going to continue to see more of these catastrophic weather events and then that has an impact on pricing and availability.

You have a couple more months on the job. What's next?

Jones: I'm beginning to explore a variety of different opportunities. My hope would be that I can bring my background and experience that I have as a regulator, as a lawyer, as someone that has worked in a very complex and complicated regulatory environment, and bring that to bear in some way, shape or form. Whether that means the private sector or public sector, I think that's yet to be seen, but I'm confident there'll be plenty of opportunities out there.

What about some of your signature policy initiatives?

Jones: I think it's fairly widely known that ... the initiatives that have been important to me include our climate risk initiative, where we've done some path breaking work around getting insurers to recognize climate risk not only in their underwriting but also in their reserving. I'm the founding chair of the Sustainable Insurance Forum, which is an international working group of insurance supervisors from around the globe that is developing common supervisory approaches to dealing with climate risk. We're the first financial regulator in the United States to undertake climate risk transitions.

Switching gears to short-term plans and association health plans, are these products good for Californians and how would you hope the next commissioner regulates them?

Jones: The unfortunate efforts of the Trump administration to undermine the Affordable Care Act, simply put, are hurting Americans. We've seen now as a result of a series of actions the president has taken that it's thrown health insurance markets in turmoil, it's led to insurers raising rates, it's resulted in some insurers leaving some markets because of the uncertainty associated with actions like cutting the cost-sharing reduction payments or the introduction of short-term plans or association health plans or any of the other things the president has done or sought to do to undermine the act.

In California, notwithstanding the president's actions to undermine the ACA, we've done everything we can to defend healthcare implementation of the act because we think it's worked well for California. It's not perfect, it doesn't mean that there aren't things that ought to be change. But given the unwillingness by the Trump administration to do anything but sabotage the act, we've been trying everything we can to protect its benefits in California. That includes passing legislation which prohibits short-term plans and prohibits or places strong restrictions on the association health plans.

In one word, how would you describe your eight years at the helm of the department?

Jones: Action. When I was sworn in in 2011, in my inaugural address, I said explicitly that what I wanted to do and what I wanted to accomplish was action that would benefit consumers and make our market a better marketplace. If you look at the history of my administration, it's been an administration that's not just talk, it's not just rhetoric, it's not just policy proposals, it's taking actions time and time again to try to make sure we fulfill the mission of insurance protection for all.

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Studios, Exhibitors Set To Spar Over Streaming

Dec. 14 2018 — According to an article published in Variety in November, Warner Bros. and Universal Pictures are expected to reopen conversations with exhibitors about earlier VOD releases for their films. The studios argue that an earlier on-demand release helps minimize piracy and allows them to better leverage the multimillion-dollar ad campaigns launched for their films' theatrical debuts.

Exhibitors, on the other hand, worry that a shorter theatrical window will reduce ticket sales as potential patrons opt to wait and watch films at home. Fewer ticket sales also lead to lower concession revenues -- the most profitable aspect of the exhibition business.

The article also notes that studios have an extra incentive to negotiate earlier release windows, as WarnerMedia is launching its own streaming service in 2019 while Comcast, home of Universal, is looking to expand its streaming offerings. Having their major films released on their respective services shortly after theatrical release could help drive subscriber growth.

Pushing for a film's possible VOD release just weeks after its big-screen debut could be seen as an aggressive move, but studios have been slowly shrinking their theatrical release windows over the past 20 years. In 1999, the average theatrical window was 169 days; this was just as the DVD market was beginning to explode and the VHS cassette was still a market factor. Soon, DVD became a massive source of revenue for studios and they began to release their films on home video at a quicker pace. In 2017, the average theatrical window dropped to 105 days before dipping to 99 days in 2018.

The major studios all trimmed their theatrical windows by a fair amount between 2000 and 2018, from an average of 172 days down to 94 days, a difference of more than two and a half months. Twentieth Century Fox and Universal Studios had the shortest average theatrical window at 89 days, while Walt Disney had the longest theatrical window at 107 days.

We tracked eight blockbuster films in 2018 that were released on home video less than 90 days after premiering in theaters. The shortest window belonged to "Venom" ($212.3 million domestic gross), which was released in theaters on Oct. 5 and will debut on DVD and Blu-ray just 74 days later on Dec. 18.

The motion-picture business has always been able to capitalize on new technology, from the TV to the VCR to the DVD player, to drive growth. Streaming video has become the primary source for home entertainment — just ask Netflix and its 137.1 million subscribers worldwide. If studios are launching their own services, they naturally want their own premiere content on those services. Studios may not get the rapid release window they are hoping for, but they will likely keep bringing it down slowly, as they have for the past two decades.

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Watch: Power Forecast Briefing Discusses Improved Spark Spreads and Profitability Projections for ERCOT and PJM

Dec. 13 2018 — In our latest Power Forecast Briefing, Steve Piper discusses recent power market activity and a forecast that points to profitability for merchant generation regions of ERCOT and PJM. Both saw improved spark spreads in 2018, but ERCOT's upside appears more limited than PJM going forward. More data and market tracking tools can be found on the Market Intelligence platform’s Power Forecast subscription.

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Nexstar Buys WGN For A Song; Divestiture Of WGN, Stakes In Food Channels Likely

Dec. 10 2018 — Walt Disney Co.'s pending acquisition of much of 21st Century Fox Inc. certainly raised the bar for cable network valuations — at 15.4x cash flow — and the divestiture of the regional sports networks may see another double-digit-multiple transaction with Amazon.com Inc. in the mix of buyers. Another deal, Nexstar Media Group Inc.'s pending acquisition of Tribune Media Co., sees stakes in three cable nets going to the buyer for single-digit multiples (6.9x).

The deal follows the collapse of Sinclair Broadcast Group Inc.'s deal to buy the company, which is now being litigated. We think that Nexstar is getting quite a deal on the cable network assets and will likely flip them for a quick profit.

When Discovery Inc. agreed to buy Scripps Networks Interactive Inc. in July 2017, the domestic cable networks were valued at $10.14 billion, or 10.5x cash flow, with Food Network (US) valued at $4.5 billion (Scripps owned 68.7%) and Cooking Channel (US) (also at 68.7%) valued at $525 million.

In the current transaction, the valuations come to $3.47 billion and $323 million, respectively. Thus, if Nexstar can get Discovery Communications to pay at least what it paid in the Scripps transaction, Nexstar may make a quick profit. Granted, minority interests typically trade at a discount. Scripps Networks Interactive, however, has tried for years to cut a deal to buy out the minority stake and it may be willing to strike a deal at a higher price to put this issue behind it.

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