The financial wherewithal of California residential property insurers to pay claims associated with recent wildfires is not in doubt, but the industry's continued willingness to provide coverage in regions of real or perceived rising risk remains an open question.
"We are confident insurance companies have sufficient reserves to pay these claims notwithstanding how large these numbers are," California Insurance Commissioner Dave Jones said Jan. 31 as he revealed claims data for wildfires during October and December 2017. A total of 44,980 claims with associated direct incurred losses of nearly $11.80 billion have been received, with nearly $5.36 billion already paid out.
Jones blamed climate change for mounting wildfire risk, but environmental factors are just one element of what might represent an increasingly perilous market for the property and casualty industry.
Chubb Ltd. Chairman, President and CEO Evan Greenberg said during a recent conference call that risk-modeling tools pertaining to wildfire risk historically "have not been good," particularly relative to those that pertain to flooding.
"But," he added, "they're improving, and there are some new tools that are out that give you a better way to imagine wildfire and the impact on the concentrations of the portfolio."
Jones also expressed concerns about the accuracy of wildfire modeling tools, particularly in what he described as the wildland-urban interface. Among his concerns is that a legislative framework is not in place for the California Department of Insurance to regulate the models to ensure their reliability, and that they fail to take into consideration steps that individual homeowners or communities may have taken to improve "defensibility" of residential properties.
He said updated models based on the recent wildfires, which in some cases hit counties where there had been lower perceived risk levels, could lead an increasing number of carriers to decline to write coverage.
"We're already beginning to see that in the Sierra Nevadas and the foothills of California," he said, citing data that purportedly shows a 15% decrease in insurance renewals across 24 counties. However, he added, the department finds that carriers continue to write coverage "in most areas for most people."
The recent launch by Jones of a regulatory review of insurers' rates in light of the "major ... windfall" that he alleges they are set to receive from federal corporate tax reform might not send the sort of signal that encourages carriers to expand their risk appetite in the California market.
"It's difficult when it comes to being able to get a proper price for the risk you're taking, and that's not to California's benefit," Greenberg said.
At the same time, the department has highlighted the recent entry of Spinnaker Insurance Co. to California's high-net-worth homeowners market as evidence of its openness to approving innovative products. A Spinnaker filing for a product billed as offering coverage for harder-to-place risks includes a provision for customers to pay $250 for an on-site wildfire consultation by a firefighter trained in defensible space and prevention.
Markel Corp.'s Markel American Insurance Co. also received approval for its new California dwelling fire program targeting a range of risk profiles, including landlords and seasonal dwellings. The product filing indicates that Markel will permit coverage of properties with scores between 0 and 8 as determined by Verisk's FireLine wildfire risk management tool; properties with scores of 9 to 12 will be "referred to underwriting for consideration." FireLine scores range from 0, representing "negligible" hazards, to 30, or "extreme." Scores of between 4 and 12 are categorized as "high" hazards.
California Fair Plan Association, the state's property insurer of last resort, is not seeing a "dramatic" increase in business despite consumer complaints fielded by the department about the availability and affordability of traditional coverage, Jones said. And, he explained, many of the Fair Plan policies are written in regions such as urban areas that have a high incidence of structural fires and arson.
A review of data contained in a 2017 Fair Plan rate filing shows that more than two-thirds of the insurer's risks in force and more than half of the total insured value of its portfolio come from policies with FireLine scores of 0.
The overall Fair Plan policy count had been declining during a decadelong stretch ending in 2016, the most recent period for which data was available. But, Jones said, "they are the canary in the coal mine."
