An increase in severity and frequency of wildfires in California could spell trouble for primary insurers and homeowners alike as reinsurance rates and policy nonrenewals may rise.
A record $12.8 billion in wildfire-related claims were filed in 2017 after a devastating outbreak of blazes. Although the 2018 season is far from over, the state has already felt the $845 million insured-loss impact from two massive fires over the summer.
Cal Fire's deputy chief of communications, Scott McLean, said the increase in the number and size of wildfires has been due to recent weather patterns that sparked a rapid growth of grass, the "fuel to a lot of these fires," in previously drought-afflicted areas.
"Early on we were seeing 10,000-acre fires, which we usually don't see," he said.
Reinsurance approach changing
The bulk of the $12.8 billion in insured losses suffered in 2017 were covered by reinsurance. For example, Mercury General Corp. has a reinsurance treaty that covers up to $190 million of wildfire-related losses beyond its $10 million retention limit. Mercury was the eighth-largest homeowners insurer in California in 2017.
Charles Goldie, CEO of property and casualty at Bermuda-based PartnerRe Ltd., said that prior to the recent spike in losses, property and casualty companies were buying wildfire-related reinsurance mainly for capital protection. Now they are starting to shift their approach.
"The pendulum had really swung towards people buying for capital protection," Goldie said in an interview. "None of the companies in California were threatened capital-wise by the events, but certainly the earnings took a beating, and using reinsurance to help control that volatility is consistent with what we're seeing across the industry."
New wildfire models emerge
Speaking at a recent Barclays conference in New York, Travelers Cos. Inc.'s CEO Alan Schnitzer said the 2017 California wildfire season was the biggest learning event for the company in the past six quarters. He pointed out that while the industry has strong modeling capabilities for hurricanes, its models for wildfires are much less sophisticated.
Efforts to improve wildfire models are underway. AIR Worldwide Corp. recently released an updated version of its wildfire model for the 13 westernmost U.S. states that better accounts for fire behavior.
AIR's senior scientist, Tammy Viggato, said many existing models and zones tend to treat the boundary between human development and undeveloped land as a "hard line" and do not take into account the ways fires can spread. The devastating Tubbs fire in 2017 spread to places that the models did not predict would be affected because embers were thrown across a highway.
The new model also accounts for mitigation techniques residents use to make their homes less susceptible to fire. Homeowners can also lower their risk by participating in community-wide programs such as Firewise USA, which requires homeowners to get risk assessments and work with their neighbors to form fire-related action plans.
United Services Automobile Association began partnering with Firewise USA in 2014 by offering 5% discounts on policies, after finding that loss ratios for areas inside Firewise-recognized communities were much better than elsewhere, said Michele Steinberg, wildfire division director at the National Fire Protection Association. Janet Ruiz of the Insurance Information Institute said other insurance companies also give grants to communities that take steps to protect themselves.
Nonrenewals continue to rise
Although mitigation strategies can be helpful, wildfires are still on an upward trend, and so are nonrenewal complaints. From 2010 to 2016, the California Department of Insurance reported a 249% increase in renewal complaints and a 217% increase of raised premium complaints from ZIP codes designated by Cal Fire as having the greatest risk for wildfires.
Insurance Commissioner Dave Jones said the state regulator is doing everything it can to encourage insurers to continue writing policies and to keep premiums low. However, insurers can use their discretion to decide whether they will renew policies or continue to write new ones for certain areas. If residents are denied traditional coverage, they have to turn to other admitted carriers, surplus-lines insurance or California's FAIR plan, an association of insurers that acts as a provider of last resort.
Of the 3.6 million housing units in California's Wildland Urban Interface, the area where human development meets undeveloped wildland, 1 million are rated by insurers as facing a high or very high risk of being impacted by wildfires.
"Areas that have traditionally thought to be of lower risk are now rated as higher risk, and insurance is going to be tougher to find in those areas," Jones said during a press conference earlier this month. "It's not a crisis yet, but the trajectory is in the wrong direction."
Jones added that roughly 33,000 people living in the WUI are covered under the FAIR plan.
The worst of this year's fires may be yet to come for the Golden State, where the most destructive fires have traditionally occurred after Sept. 1. Fire experts are predicting that the next couple of months will bring more blazes and additional catastrophic losses.