California is not at a crisis point yet in terms of the availability of insurance to citizens burnt out in last year's fires, but the trends are not good, Dave Jones the state's insurance commissioner says. David Walker reports
The Californian insurance commissioner Dave Jones tells Environmental Finance, sister publication to InsuranceERM, the number of insurers declining to write property cover against fire had risen "for a number of years...because [underwriters] concluded the risk of fire to a given home is too high."
"It's a problem," Jones says, "and we anticipate that more homes will be rated by insurers as high- or very-high risk, and [there will be] more homes that insurers will decline to write [cover for]. We are going to see this problem grow and grow."
Jones spoke to Environmental Finance ahead of keynoting its Insurance and Climate Risk Americas conference in New York on 24 September.
He adds from 2015 to 2016 there had already been a 15.3% jump in non-renewals across about 30 districts where forests meet urbanised areas – "areas heavily forested, with a lot of brush, where there's a high risk of fire".
But he says the true "canary in the coal mine" of un-insurability will be the California Fair Access to Insurance Requirements Plan (FAIR). The plan is a non-profit insurance pool of last resort, established by the state's then-governor in 1968. Originally founded to include cover of otherwise uninsurable properties for the danger of rioting, it has come into sharp focus recently as some insurers stop covering citizens' property for forest fire.
"If we started to see a dramatic increase in FAIR plan policy subscriptions, we would know that people are not able to find insurance elsewhere", Jones warns.
That hasn't happened yet. Policies written by FAIR in medium to high risk wildfire areas number just 33,000 "versus some millions of homes that are otherwise insured through the private market." Coverage by FAIR increased only by about 1,000 policies year-on-year, Jones explains. Overall FAIR has 123,000 policies.
Jones, however, is not complacent and nor should he be. The Carr fire ignited the northern counties of Shasta and Trinity last month quickly incinerated around 1600 structures, compounding the misery of the populous. This also exacerbated the $12.6bn bill insurers already faced from the infernos of 2017.
Jones predicts "significant" costs from this year's fires. A.M. Best, the researchers, point to estimated insured losses of $1.5bn, and counting, from Carr, making it the state's sixth most destructive fire.
Six of the state's 20 costliest blazes have occurred over the past 18 months, according to the California Department of Forestry and Fire Protection.
A.M. Best says it is "too early to call the two consecutive devastating fire seasons a trend".
However the researchers speak of growing concern over the mix of a growing population, building on previously remote areas, and rising long-term temperature trends. California has not experienced a cooler-than-average year for 19 years potentially making frequent damaging fires the "new normal."
Largely due to 2017's infernos, insurers of California's farms and homes suffered a nearly fourfold jump in their full-year direct losses, to $16bn (2016: $4.2bn). California can ill afford to have large players drop out of the market, as just 10 wrote 76.4% of the market share in 2017.
A.M. Best does not foresee this – "Despite a loss-affected 2017, most large writers in California are larger national companies and have enough capital to tolerate these back-to-back extreme wildfire seasons, helped by reinsurance partners."
But it still counsels underwriters to "reconsider their underwriting strategies and risk management to reflect shifting conditions in the current landscape. Less sophisticated insurers who may have suffered losses will have to use more sophisticated analysis for decision-making with regard to underwriting and pricing for perils such as smoke, ash, and brush fire may have to be re-evaluated."
The researchers add terms and conditions for replacement cost values and living expenses "will need to be more carefully examined for underwriting and pricing decisions".
Confirming insurers honoured legitimate claims last year, often in the face of incinerated documentation and housed homeless policy holders were two areas where Jones acted quickly and robustly in late 2017.
Jones also proposes an obligatory review, pending approval, by authorities of the fire risk models that insurers use to gauge risk and, ultimately, insurability against fire damage.
There was some nervousness amongst insurers at politically-motivated interventions into their risk modelling. But Jones told Environmental Finance a key issue was that underwriters were assigning risk scores to individual homes without allowing for actions their owners had taken to defend their homes from fire, or reduce the risk.
The fact the state's legislature has not yet taken up the proposal, Jones dubs "unfortunate...and currently the insurers have unfettered discretion in terms of the models used to assign fire risk scores.
"If the legislature doesn't begin to get ahead of this issue, at some point it will become a very big problem for a lot more people in a lot more parts of California," Jones says.
And he foresees worse to come for his state, under the effects of a warming climate. "Experts tell us that the change in climate, increase in temperatures, drier conditions, those are contributing to the fires that we have been seeing in California. Based on that scientific expertise, and the fact that the world not moving fast enough to address climate change, we are going to see temperatures continue to rise in California and globally, and see more frequent, more severe and unpredictable fires in California.
"We are going to have to adapt in California a lot faster than is currently the case."
Addressing "the risk to insurers and their underwriting and reserving" is just one step Jones advocates. Others are about assessing where to permit new building, alarm systems, changing forest management, and investing in prevention such as installing infrared cameras.
"It's definitely the new normal for California. It's been coming for some time [and] will require some real changes in how we do things here."
For further details of Environmental Finance's Insurance & Climate Risk Americas event click here