California Wildfire Losses May Make Properties Uninsurable in High-Risk Areas

California Wildfire Losses May Make Properties Uninsurable in High-Risk Areas

Commercial Real Estate Owners Face the Prospect of Premium Increases, Cancelled Policies

BY RANDYL DRUMMER  (via CoStar Group)

Sacramento firemen getting ready to deal with a fire emergency in Davis, CA downtown

Sacramento firemen getting ready to deal with a fire emergency in Davis, CA downtown

Massive commercial and residential property losses from California wildfires, including the most destructive fire in state history last month, threaten to overwhelm insurance companies. It raises the prospect that owners of business and residential real estate could soon face premium increases, policy cancellations or even inability to obtain insurance in large swathes of the Golden State.

The California Department of Insurance’s latest claims data from insurers reached $9.05 billion in losses from the Camp Fire, which killed at least 86 people and destroyed almost the entire town of Paradise, California, along with nearly 19,000 structures; and the Woolsey and Hill fires in Los Angeles and Ventura counties last month.

“We know this number is going to climb,” said Insurance Commissioner Dave Jones, who expects losses in coming months to surpass the $12 billion in insurance losses from fires that destroyed 8,900 homes and buildings in in Mendocino, Sonoma and Napa counties in October 2017. “This is a huge problem for people living in the communities of the wildland-urban interface. It’s increasingly difficult for people to find insurance.”

There are roughly 3 million homes located where wildlands intersect with urban areas in California, such as Malibu near Los Angeles, and Paradise, 15 miles northeast of Chico, the most populous city in Butte County, which is located about 88 miles north of Sacramento, California’s capital. The devastation has been so widespread, some wonder whether many of the areas will even be rebuilt at all.

Insurers are already lawfully raising rates, denying policy renewals and refusing to write new policies in many parts of California in response to the growing risk of more severe and frequent wildfires – and the ensuing threat of flooding in the burn areas – stemming from climate change-induced drought, Jones said.

The Camp Fire has already caused one small insurer, 112-year-old Merced Property & Casualty Co., to collapse this month under an overwhelming number of claims. The Department of Insurance will take over policies held by Merced, which reported just $23 million in assets against $64 million in claims, mostly from properties destroyed in Paradise.

Jones said the insurance department has so far not received any other reports of companies in such a dire financial situation as Merced. But the massive fire losses of the last two years are a huge challenge to the insurance industry and its future business in the state, he added.

“We’ve not seen any insurers leave the market in total, but we know given the enormity of these events, we are steadily marching toward a future in California where private insurance may not be available in high-risk fire, flood and coastal areas unless we make policies decisions to make sure insurance is still available,” Jones said.

Jones issued a formal notice to insurers asking them to expedite claims by cutting through red tape and issuing checks immediately for four months of out-of-pocket costs, and doing all they can do to help policyholders who are likely to have little or no documentation that insurers normally require.

The Camp Fire last month destroyed most of Paradise and Concow, California. Credit: U.S. Forest Service

Record Devastation

The Camp Fire, officially California’s largest and deadliest fire, comes on the heels of a destructive 2017 fire season. Unlike previous wildfires, the Camp and Woolsey fires impacted populated areas and surpassed all previous records for structural damage.

Only 6.3 percent, or $571 million, of the claimed losses for the Northern and Southern California fires are for commercial property, according to the insurance department. Some estimates of total costs to businesses, homeowners, the state and insurance companies top $19 billion, far surpassing the $12 billion in insured losses from last year’s fire in Napa and Sonoma counties.

Others are more conservative. Boston-based catastrophe risk modeling firm AIR Worldwide estimated up to $13 billion in total insured losses from the Camp and Woolsey fires. Zurich, Switzerland-based Chubb Ltd., the largest commercial insurer in the United States, this month reported $225 million in fourth-quarter pretax losses from the California wildfires. That’s on top of up to $250 million in losses from Hurricane Michael in the Southeast last fall.

Fitch Ratings noted that insured losses, while significant, are expected to remain within the estimated ranges used by the insurance industry in pricing catastrophe risk into their customer premiums.

“Insurance companies with exposure to the California wildfires are generally the larger, more capitalized national carriers that as a group, have high insurer financial strength ratings,” Fitch analyst Christopher Grimes said in a report.

However, carriers are likely to face an arduous task in determining the current values of structures and paying claims, especially for homes destroyed by the fires. Maintenance and remodeling construction activity on residential properties in Butte County rose more than 8.57 percent this year through October compared with last year, resulting in improvements not factored into government-assessed valuations, according to construction data provider BuildFax.

Commercial insurance agents in Butte County don’t know what the future holds for insurance payouts for their client in the burn areas, or whether Paradise, formerly a town of more than 26,000 people, will ever be rebuilt.

“Not one representative that I’ve talked to has any idea of what the future holds, other than that costs and premiums are going to go up,” said Nick Mariottini, commercial risk advisor for Dahlmeier Insurance Agency, an independent insurance agency based in Chico, California, 15 miles east of Paradise.

Uncertain Future

For now, Paradise is a town that no longer exists. The Federal Emergency Management Agency (FEMA), U.S. Environmental Protection Agency and other agencies responsible for cleaning up hazardous waste, will control access to the area through much of the next year, Mariottini said.

“No one’s been able to go up there yet and adjust a loss,” said Mariottini, whose agency provides commercial, residential and auto coverage through a variety of national carriers such as Nationwide, Liberty Mutual and Travelers Insurance. “They’re not letting insurance people in.”

He added that “this fire is a game changer. Between 14,000 and 18,000 structures are completely gone, and no construction company is going to put a single nail in anything for the next 24 months. Half the people I’ve heard from are not going back, whether it’s cost effective or not. The memories of that day are just too hard for them to deal with.”

Even before the fire, an increasing number of insurance carriers over the past two years have backed away from renewing or writing new policies in the Paradise area, other local insurance agents said.

“We’ve gone from a score of 5 to an 8 on the fire risk scale based on the fire mapping,” said one agent, who asked not to be named because of the sensitivity of the issue. “Actuaries have rezoned and reclassified the area as really high risk.”

The losses extend to business owners in Chico and other areas unscathed by fire but served companies that were damaged or destroyed, from janitorial services to alarm and security companies. Such uninsured losses are still being calculated and won’t be included in insurance loss totals or actuarial data, Mariottini said.

“Some companies have lost up to $300,000 in service contracts,” he said.