Wildfires have burned an unprecedented swath of California this year, scorching more than four million acres, according to the California Department of Forestry and Fire Protection. In the wake of all this destruction, insurers have experienced huge billion-dollar losses and the state has seen an erosion of the insurance market as carriers exit.
Against this backdrop, RPS Area President Ron Abram provides an on-the-ground perspective behind what’s igniting the California wildfires, what is being done to address the challenges the state faces, and the few alternatives available to brokers and their insureds as carriers stop insuring homes in catastrophe-prone areas.
The Perfect Storm: Why California Is Burning
“We’ve always had fires in California, but there are several factors that have exacerbated the rate and expanse of the wildfires,” explains Abram, “including forestry management, population encroachment into rural areas, and increasing temperatures.
“The legacy of forest management practices to aggressively suppress fires rather than allowing them to burn, combined with environmental initiatives, has left forests very dense with too many trees per acre, dead trees and an understory of brush. This creates excess fuel under the canopy of the forest so, when there is fire, it’s super hot and acts as a ladder moving up the trees and into the crowns.
“Potentially aggressive winds then blow embers far into the distance, igniting other fires. Combine this with hotter and drier weather brought on by climate change, these overloaded forests stoke extreme fires.”
The risk to people and property is also rising because of the increasing number of homes and businesses being built in and near wildfire-prone areas.
Abram says that increased tree mortality due to bark beetle infestation has changed landscapes in ways that make them more likely to burn. Bark beetles infest already dead or dying trees, and years of drought leave trees unable to defend themselves. The mountain pine beetle alone has killed roughly 100,000 square miles of trees across western North America over the past 20 years, from New Mexico all the way up to northern British Columbia, for example.1
“We’ve had some big conflagrations as a result of all the issues with dead timber,” Abram says.
The lack of utility maintenance is also a contributing factor to California’s wildfires.
“The entire town of Paradise nearly burned to the ground,” notes Abram. “It was such a big loss event that insurers could no longer look at maintaining their positions in the state, and began withdrawing.”
Work is being done to try and change the course of the severity of the wildfires in California and to mitigate some of these exposures, including rethinking forestry management practices, logging dead timber, and allocating funds for new equipment and additional staffing.
In August, California governor Gavin Newsom signed a memorandum with the Forest Service and others recognizing that the state needs more preventive fire programs, saying “California’s forests naturally adapted to low-intensity fire, nature’s preferred management tool.”2
However, “These measures will take a long time to make an impact,” says Abram.
The Insurance Market Is Dry
The fire in Paradise was the tipping point for insurers.
“We’ve always experienced market entries and exits here – where you would have one carrier leave and another leverage an opportunity to step in. However, in the past, while losses were significant, they were not in the multi-billion-dollar range. Carriers could spread their risk and absorb the losses through rates. The fires in 2017 and 2018 changed all this,” says Abram.
Insurers, for example, received more than $11.7 billion in claims from California wildfires in 2017, and more than $11.4 billion in insured losses from the November 2018 fires.
As carriers looked to leave the state in 2019, the CDI mandated a one-year moratorium on non-renewal of homeowners insurance for 800,000 homes in ZIP codes near wildfire disasters. The moratorium is set to expire soon with the commissioner looking at potentially issuing another moratorium.
With very few market options for wildfire-prone areas, the end result is that the California Fair Plan is writing more homeowners at a high price. It’s estimated that in 2015, the Fair Plan wrote 130,000 policies; as of December 2019, it has written 180,000 policies.
“It’s difficult for brokers to find a home for their clients,” explains Abram. “We often write a Difference In Condition (DIC) policy while the Fair Plan provides fire coverage for the homes. We also have a program available that, depending on the insured and the measures in place to mitigate risk (like fire-retardant materials and defensible space), may offer coverage. It’s a very selective program that requires in-depth underwriting to determine eligibility.”
Client Communication & Education Are Critical
Abram stresses that it’s important for agents to educate insureds on what is going on in the marketplace.
“Coverage in cat-prone areas is available for some risks, but clients should expect that premiums will be high and that companies are very selective as to who they insure. Make sure clients know what to expect, and hold their hands throughout the process. Also, do your due diligence as to what is available including the option of providing DIC policies.”
It’s also important to conduct an ongoing review with insureds to ensure clients are taking care of their properties, employing measures and practices to make them more defensible against wildfires.
“Continue to stay in contact with the customer,” Abram stresses.
Sources: California Department of Insurance, LA Times, 1National Geographic, 2NY Times, USC