The devastating wildfires that swept California in January have left more than just scorched landscapes and displaced communities. The fallout from these fires is expected to send ripples through the property insurance market for months to come, with homeowners feeling the most immediate impact.
This month, Lloyd’s of London revealed it had taken a financial hit of around $2.3 billion from the fires. According to Moody’s, the high-value homes and businesses in the affected areas suggest that insured losses will be among the most significant in California's history.
State Farm, the largest homeowners’ insurer in the state, sought an emergency 22% hike in its homeowners’ insurance rate, which California Insurance Commissioner Ricardo Lara provisionally granted on Friday (March 14), pending a formal hearing next month.
At least one expert told Insurance Business affirmed the California homeowner's market is poised for a dramatic shift, with higher premiums, stricter policies, and fewer coverage options. At the same time, commercial properties will face increased scrutiny in underwriting as insurers grapple with significant losses from the event.
“The impact is going to be quite different in both segments,” said Marshall Heron (pictured), national real estate practice leader at Risk Strategies. “There were already a lot of insurers that pulled out, significantly reduced coverage, or stopped renewing homeowners’ policies before this event, so I think the impact there is going to be much greater in terms of rate.”
A shift to excess and surplus (E&S) markets, where insurers operate outside of state regulatory constraints, is becoming a reality for many California homeowners, especially those in high-risk wildfire zones, according to Heron. This unregulated space allows insurers to set their own terms, often leading to higher premiums and less consumer protection.
On the commercial side, however, the wildfires’ impact will be more subdued in terms of premium increases but will be felt in other ways. Stricter underwriting will mean businesses must prove they have taken adequate mitigation measures, from fire-resistant construction to defensible space around properties.
Underwriting criteria in wildfire-prone areas are shifting, with insurers weighing certain factors more heavily. “Construction type is going to be big,” Heron stressed. “Are properties sprinklered or non-sprinklered? How far are they from wildfire zones? How far are they from fire departments?” These factors will determine whether properties remain insurable and at what cost, he said.
As insurance carriers reassess their risk models, the question of whether some areas will become entirely uninsurable looms large. Heron, however, remains unconvinced that California has reached that tipping point.
“As rates rise, and there’s a segment of the market that can increase rates beyond what the Insurance Commissioner allows, it may bring other insurers into the marketplace as rates reach a point where they believe there may be a greater level of profitability,” he said.
A more imminent issue in the wake of the wildfires is underinsurance. Many homeowners assume their coverage will fully cover rebuilding costs, only to find themselves short when disaster strikes. Rising labour and material costs post-disaster only exacerbate the gap, leaving many homeowners unable to rebuild. Heron said this gap will only be exacerbated by rising premiums and shrinking coverage.
“If we look at the history of some of these large fires, specifically the one in Colorado three years ago, about three-quarters of the homeowners were underinsured,” Heron said.
Mitigation efforts will also play a key role in influencing insurance availability and pricing. Regulatory changes are also on the horizon, as state officials attempt to address the growing crisis. Last month, California Governor Gavin Newsom signed an order directing the state to hasten long-delayed regulations requiring homeowners in fire-prone areas to clear combustible materials around their homes.
“Clearing dead plants, removing wooden furniture, (these are) things people might overlook outside forested areas,” said Heron. “There will be more focus on how homes are rebuilt and the materials used, especially roofing. If a roof isn't fire-rated to a certain degree or is past a certain age, insurers may change terms, offering actual cash value instead of replacement cost. There may also be some insurers that impose higher retentions specifically for wildfire damage.”
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