A small decline in policies in force for California's property insurance residual market did not lead to a similar reduction in wildfire exposure.
Data disclosed in a pending rate filing show that the overall composition of California Fair Plan Association's book of business has changed significantly in recent years and become more exposed to properties modeled to be at higher risk to wildfires at a time in which multiple large fires have destroyed thousands of properties and claimed dozens of lives in the Golden State.
An annual California Department of Insurance data call, which was released in July, put the Fair Plan's policy count at 123,169 in 2017, excluding earthquake coverage, or approximately 6% of the state's overall dwelling fire market. That marks a decline of 1.2% for the comparable figures collected by the department for the 2016 data call.
Policy counts reported by the Fair Plan in a pending rate filing are slightly different, but directionally consistent. The company said it had 124,391 earned exposure units across its fire and allied lines business as of its fiscal year-end date of Sept. 30, 2017, down 1.2% from the same point a year earlier. But the mix of business in its personal dwelling fire and allied lines program, which constituted the vast majority of those exposure units, showed steadily higher levels of risk coming onto the Fair Plan's books in recent years.
To demonstrate that change, the rate filing broke out the Fair Plan's exposures by the scores they received using FireLine, a Verisk Analytics tool that assigns numerical scores of 0 to 30 based on a property's modeled level of wildfire risk. A score of 0 represents negligible risk; a score of 30 amounts to an extreme hazard.
Approximately 68.2% of the Fair Plan's dwelling fire program policies in force as of Sept. 30, 2017, had a FireLine score of 0, down from 71.1% one year earlier and 79.5% five years earlier. Its relative mix of policies with FireLine scores of between 1 and 5 rose to 12.3% as of Sept. 30, 2017, from 11.9% and 9.1% on the same dates in 2016 and 2012, respectively. Its mix of business with FireLine scores of 6 and higher increased to 19.5% as of Sept. 30, 2017, from 17% and 11.3% at the same points in 2016 and 2012.
Wildfire risk has also accounted for rising shares of the Fair Plan's premiums and losses in recent years. Wildfire business accounted for 21.6% of the direct earned premium in the dwelling portion of the dwelling fire and allied lines program as the company charges a wildfire premium to insured properties with FireLine scores of 2 and above. It accounted for only 7.4% of that business in 2013. From a loss and defense and cost-containment expense, or DCCE, perspective, the share attributable to wildfire business soared to 70.9% in 2017 from 7.4% in 2013.
Fair Plan attributed its rising wildfire exposure to increased underwriting restrictions employed by voluntary market carriers, as well as higher frequency of wildfires. To the latter point, the company said that it experienced a wildfire "every 4 to 9 years" between October 1990 and December 2006. Since then, it has experienced at least one wildfire per year, with the lone exception of 2012.
"Not only have properties across California been built closer to wildfire areas in recent years, but the Fair Plan's footprint of properties has also significantly shifted towards wildfire areas," the company said in the rate filing.
The Fair Plan had reported losses and DCCE from fire catastrophes of nearly $49 million in accident year 2017, up from $9.9 million in accident year 2016 and more than 2x the aggregate amount of reported catastrophe losses and DCCEs for the company from accident years 2011 through 2016 combined.
The filing, which remains pending before the California Department of Insurance after multiple rounds of correspondence between the parties, attempts to realign the Fair Plan's base rates to better reflect exposure by peril. In particular, it seeks to split the fire base rate into wildfire and non-wildfire components. The impact of the filing, as proposed, would increase wildfire rates by 81.2%, reduce non-wildfire fire rates by 3.4% and lower allied lines rates by 20%.
In response to an objection raised by the California regulator, Fair Plan explained that it was looking at probabilistic models to determine wildfire rates given that relying solely on historical experience would have the effect of "grossly underestimating potential catastrophe events."
Higher losses for the Fair Plan could have implications for private carriers. All P&C companies that engage in writing any component of basic property insurance in homeowners or other multiperil dwelling policies are members of the Fair Plan, and they participate in the Fair Plan's profits and losses in direct proportion to their market share in the applicable lines.
The two largest California homeowners writers based on 2017 direct premiums written, with combined market share of 33.5%, were the groups headed by State Farm Mutual Automobile Insurance Co. and Farmers Insurance Exchange. American International Group Inc. and Farmers led in the fire line. The largest non-liability commercial multiperil writers were Farmers and Travelers Cos. Inc.
