Wildfire activity and its effect on the California insurance market
Robert Pritula
As 2022 begins, the reality of moving from a defined wildfire season to the potential of year-round wildfire activity in California has never been clearer with active, widespread wildfires across the northern and southern areas. Instead of receiving most of its rainfall during the winter months, it’s experiencing prolonged droughts, not to mention the fact that from 2017 to 2021 high winds have produced some of the worst wildfire years in California’s history.
According to the latest Verisk estimates, there were more than two million California properties at high to extreme wildfire risk in 2021—the largest number of at-risk properties in any U.S. state. Additionally, the loss of vegetation from wildfires often leads to mudslides and floods when rain returns, generating added risk for property damage and loss. These circumstances have resulted in the personal lines insurance market hardening, with many carriers looking to change or alter their approach to insuring properties in California.
State of the market: Non-renewals and rate increases continue into 2022 and 2023
Most premier carriers continue to look for ways to return to profitability in the California homeowners insurance market. Several have pulled back from underwriting homeowners insurance throughout the state as a reaction to losses from the increase in wildfire activity along with a challenging regulatory environment. These conditions have resulted in fewer homeowners insurance options, higher premiums, and more limited coverage terms.
Carriers are also dealing with an exceptionally large concentration of risk in high/extreme wildfire areas in certain parts of the state, which further limits their ability to offer new policies in these areas. Los Angeles County is the most challenging area due to residential concentration. However, many other parts of the state have similar concerns. Middle market carriers are also experiencing similar challenges. The ultra-high net worth homeowners insurance market is the most limited currently, though, since options and choices are often limited because of higher home values—especially for those homes valued $10-$15 million or above.
COVID-19, supply chain, and inflation influence reconstruction costs
Every year, carriers evaluate the cost of rebuilding homes. We have seen the trends for everything from home appliances to custom stonework to labor prices affecting reconstruction costs over the past two years. Carriers apply an inflationary factor to homeowners policies each year at renewal to keep up with these increasing expenses. Given the tremendous disruption from COVID-19 and related supply chain issues, carriers are expected to apply an inflationary factor in California anywhere from 9%–12% in 2022. Premium costs are built around the total insured value of a home, so we expect to see premium costs continue to rise.
The law of large numbers
A “hard” insurance market is when demand is high, but supply is low. It’s a good reminder that insurance is based on the law of large numbers. When losses increase by frequency, severity, or both, the overall pool of premium must increase to offset those losses. The simple fact that a policyholder was or was not directly affected by a recent claim does not determine the impact on their premium or insurability. In California, the location of a property and its risk profile for wildfire are the most significant factors driving rates and insurability right now. While those with a higher risk profile will see the greatest change, all California homeowners will be affected.
Impact on the future market as well as excess and surplus carriers
In addition to increasing premiums and changes to coverage terms, we are seeing other shifts in how high net worth carriers are moving forward with their California personal insurance policies. Several insurers are planning to implement wide-scale non-renewal plans in order to manage their exposure in areas where they believe there is a disproportionate risk of wildfires. While this activity has previously only affected the homeowners insurance market, valuable articles policies and other coverages will also be impacted as carriers face increasing complexity in obtaining reinsurance to manage their risk. This will put more pressure on excess and surplus (E&S) carriers to provide solutions for these risks.
E&S carriers have played a bigger role in the insurance market in recent years and brokers will rely on them even more this year. These carriers have more flexibility in how they price risks and the coverage terms they offer because they are not regulated by the State of California in the same way admitted carriers are. This allows E&S carriers to offer coverage for homeowners with higher wildfire risk. E&S carriers will continue to see extensive growth in 2022 as more admitted carriers limit their new business and non-renew policies.
Additional homeowner considerations
During this challenging time in the insurance marketplace, there are some steps homeowners can take to avoid prompting a mid-term policy cancellation or non-renewal. In addition, there are steps to take to ensure a smooth process if you plan to sell your home soon:
Discuss any home renovation projects with your insurance advisor early in your planning stage, and do not begin construction until you have successfully secured insurance for the full period of construction. Home renovations can change the risk profile of a property, which may trigger a mid-term cancellation or non-renewal.
If you’re considering buying another home, whether a mortgage will be placed on the property or not, it’s important to confirm that the property is insurable before making an offer or finalizing the closing.
Likewise, if you’re planning to sell your home, a prospective buyer may want to make sure they can obtain coverage for the property before making an offer or closing. If you sell a home located in a “high” or “very high” fire hazard severity zone, you’ll need documentation of a compliant Defensible Space Inspection. Review this resource for more information.