Can insurers face the heat in California?
The 2017 wildfire season in California set new records for the destruction, taking the lives of more than 45 people, destroying more than 32,000 homes and ravaging 1.2 million acres of land. The 45,000 insurance claims and estimated insured losses of close to $12 billion that followed make the October and December 2017 fires the costliest in California’s history, according to the California Department of Insurance (CDI).
As a direct consequence, California’s Insurance Commissioner Dave Jones warned in January that some homeowners might not be able to find insurance in future. “Insurers are increasingly using computer models to assess the risk of fires for individual homes and deciding that homes in some areas face too high a risk. In the wake of last year's wildfires, we may see more areas of the state where insurers decline to write.” For a state that, according to the 2017 Verisk Wildfire Risk Analysis, is the most wildfire prone region in the US with over 2 million households at ‘high or extreme risk from wildfire’, the next 12 months could be an anxious period for many Californian homeowners looking for insurance.
Before 2017, the CDI had already picked up a trend of insurers withdrawing from the market. In its most recent report on wildfire risk, it found that in 2015-2016: “...there has been a significant increase in insurer-initiated non-renewals in the California counties with the highest proportion of homes located in high-risk-for wildfire areas.” News organisation CNBC also reported that following previous fire disasters, insurers declined to renew over 10,000 policies in fire-risk areas in 2016.
Insurers are increasingly using computer models to assess the risk of fires for individual homes and deciding that homes in some areas face too high a risk.
The latest fires can only serve to quicken this trend, particularly when reinsurance pressures are added to primary losses for domestic carriers says Rob Beere, Property Underwriter for Hiscox London Market. “The big catalyst for change might be reinsurance, with a lot of domestic carriers having already renewed their treaties on 1 April or looking ahead to 1 July. Their reinsurers will also be exposed to last year’s hurricanes on the east coast and so any rise in their pricing will filter down to the direct carriers and their insureds,” says Beere.
Increasing rates to the rescue?
In an attempt to address the issue, the CDI has agreed to allow admitted insurers to increase homeowners’ rates in response to the wildfire losses. But, this has not been enough for many, says Beere: “There is evidence that numerous domestic carriers have not been renewing existing homeowners’ cover.”
The California Department of Insurance has agreed to allow admitted insurers to increase homeowners’ rates in response to the wildfire losses but this has not been enough for many.
In addition, Commissioner Jones has stated that more homeowners have signed up to California’s FAIR Plan, the state’s insurer of last resort. Given that Jones has already had to issue a ‘cease and desist’ order to FAIR Plan after receiving information that it had stopped writing new homeowners’ policies in "current active fire zones across California", how far can Californians rely on it?
With uncertainty surrounding domestic carriers' continued support for the Californian homeowners’ insurance market, could the London Market have a greater role to play? It could, but that depends on how the admitted market reacts, says Beere. “Most coverholders I’ve spoken to have seen a marked uptick in submissions on the back of those carriers not renewing risks. All it takes is one large admitted carrier to change its appetite for Californian homeowners’ risk and it could materially increase the share taken by the London Market.”
It is a potential opportunity in which Hiscox believes it has a role to play. “We’ve been looking at the Californian homeowners’ insurance market for more than a year,” says Beere. “The challenge is to avoid building up concentrated pockets of exposure, which we believe we can achieve through our new online rating engine. Our coverholders will link their systems directly into ours, allowing us to give an immediate price which takes into account a much more sophisticated view of our exposures.”
All it takes is one large admitted carrier to change its appetite for Californian homeowners’ risk and it could materially increase the share taken by the London Market.
This understanding of aggregate is particularly critical for wildfire risk, which needs to be underwritten as a catastrophe peril, says Beere. “In many ways it is a more severe catastrophe peril than wind, as wildfire is likely to destroy a whole house, whereas wind might just blow off a roof. In the past, wildfire has slipped under the radar as a catastrophe peril because it’s not widely modelled – people don’t give enough consideration to the aggregation.”
Long term partnership
Given the uncertainty surrounding the Californian homeowners’ market, the role that surplus lines carriers can play will depend, as Beere says, on moves from the admitted carriers and how the CDI responds to tightening in the domestic market. “The market is in a state of flux at the moment and while there hasn’t been dramatic and immediate change, the sustained heavy losses for domestic carriers will create opportunities for the London Market, which is why we want to build partnerships that can serve the Californian homeowners’ market in the long term.”