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California, insurers brace for another round of severe wildfires

This year's wildfire season in California could lead to the same kind of devastation that the Golden State saw in 2017 and 2018.

Vegetation produced by a wet winter and a mild spring has dried out, as have trees and limbs felled by snowfall at higher elevations, creating potential fuel for another round of severe wildfires. Despite a relatively quiet year so far, the signs point to a difficult season, particularly in Southern California, Chris Dicus, professor of Wildland Fire and Fuels Management at California Polytechnic State University-San Luis Obispo, said.

"It's just like clockwork. Everywhere, we've had six months of drought," Dicus said in an interview. "It's hot, it's dry, and then the Santa Ana winds show up. It's something that we've come to expect. Everyone crosses their fingers and says, 'Well, hopefully, it's not this year.'"

Daniel Gorham, a research engineer with the Insurance Institute for Business & Home Safety, said those conditions are year-round worries and hard to forecast.

"Instead of trying to forecast or have a prediction for the season, I look at it as preparedness all around," Gorham said in an interview. "There are simple things we talk about for wildfire resistance and resilience that really can be incorporated to year-round maintenance, so it doesn't matter if it's a red flag or not. You're kind of always prepared."

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The insurance industry continues to improve catastrophe modeling for wildfires, according to Keefe Bruyette & Woods analyst Meyer Shields. He said there is now a better understanding of the exposure to potential losses from hazards such as smoke and traveling ember and models have gotten "more granular" in determining risk.

Wildfires are now being treated as a "significant" risk for insurers and that is leading to greater underwriting discipline and higher prices, Shields said in an interview.

There were 6,284 fires reported in California in 2018, with more than 876,000 acres burned. The California Department of Insurance reported that direct incurred losses from November 2018 fires alone totaled just over $12 billion. Add in just under $1 billion in losses from the July fires and the total climbs to $13 billion.

Fallout from the 2018 fires included the liquidation of Merced Property & Casualty Co. and utility giant PG&E Corp. and subsidiary Pacific Gas and Electric Co. agreeing to an $11 billion settlement to pay claims generated by certain blazes. Eight months prior, PG&E filed for Chapter 11 bankruptcy protection in anticipation of those claims.

Shields said that, after initially being overwhelmed by the losses, insurers are no longer in a "panic situation" and have a "calmer recognition" of the need for "appropriate rate for this particular peril," particularly for reinsurance companies.

"It's uncertain, but it's quantifiable to the extent that it is necessary," he said. "We do have ... a lot of reinsurance capacity out there that will be deployed at appropriate expected returns with a system for higher rates now that this peril has been recognized."

Homeowners in high-risk areas are either paying higher premiums or losing their policies. The California Department of Insurance reported that between 2015 and 2018, there were 8,700 fewer new or renewed homeowners policies in the 10 counties with the most homes in high or very high-risk areas.

Many of those homeowners later obtained policies through the state's FAIR Plan, which had a 177% increase in policies between 2015 and 2018.

Dicus, who heads the Wildland-Urban Interface Module of the California Fire Science Consortium, said that increase comes from building communities like Paradise within the interface, defined as where human development meets the natural environment. The town of Paradise was virtually wiped out by the Camp Fire that burned 155,336 acres, destroyed 18,804 structures and killed 86 people.

"Unfortunately, Paradise is symptomatic of areas all across the western United States, where you have fire-prone buildings being built in fire-prone areas," Dicus said. "And then we all look around and are just absolutely shocked the communities are burned down. It's just simple physics."

Dicus said he rejects the idea put forth by some that destructive wildfires are the "new normal."

"It's only the new normal because of ... our past decision-making," he said. "We got into this problem, and if we have the political will to do so, we can work our way out of this problem."

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