California wildfire risk: tackling the most challenging risk in an equally challenged market

It might seem to some in the wider re/insurance industry that wildfire risk has slipped down the agenda in some ways. Severe convective storm is now widely regarded as by far the costliest peril and the US hurricane season has stolen all headlines this fall.

Another reason wildfire risk might have slipped down the agenda is that 2023 wasn’t too bad for insurers—in comparison to some very bad previous years. Some 2.6 million acres burned in 2023 compared to the decadal annual average of 7 million acres. That said, 2023 was the deadliest year in the last century, with the Lahaina fire in Hawaii causing over 100 deaths.

But one good year has not made a growing problem go away. North America has now experienced at least one over $1 billion wildfire loss event in eight of the last 10 years. There is also more evidence pointing to the deadly combination of high winds and fire risk. The Camp (2018), Marshall (2021), and Lahaina (2023) fires were all influenced by very strong winds, which spread the fires from wildland sources into suburban communities.

“Insurers are unable to move at the speed they need to if they are to manage very complex market conditions," Jeff Walton, director at Howden Re

In California, one US state where the risk is greatest, the problem is also compounded by major regulatory challenges. Jeff Walton, director at Howden Re, told APCIA Today that fewer headlines about the risk in 2024 has not made the problem go away – if anything the challenges facing the insurance market in the state are more complex than ever.

“The problem is nowhere near solved; the market remains very challenged,” he says. “Many large, national carriers have stopped writing business in the state. Insurers are unable to move at the speed they need to if they are to manage very complex market conditions.”

By way of illustration on how bad things have become, he cites the growth of the California FAIR Plan Association, a pool established to meet the needs of California homeowners unable to find insurance in the traditional marketplace. In 2018, it contained some 80,000 policies. In 2024, that had risen to 375,000. “That is a significant change and a stark representation of the state of the market,” he says.

It is even more significant when you understand how the FAIR plan works. The FAIR Plan is not a state agency, nor is it a public entity. There is no public or taxpayer funding. Instead, it is a syndicated fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California. Each member company participates in the profits, losses and expenses of the Plan in direct proportion to its market share of business written in the state.

This means that the ultimate liability for risks insurers did not want to write, ends up falling back to the insurers. The plan does purchase reinsurance but with the cost and availability of this skyrocketing, this too falls back on the state’s insurers. “This is also a challenge,” Walton said.

Combine this with a very restrictive regulations for insurers anyway around their freedom to set and adjust rate in the state. The state will not allow insurers to include the cost of reinsurance in rate filings. There are also restrictions on which risk models may be used.

“Writing wildfire is difficult at the best of times. As things stand, it is almost impossible for insurers. Their reinsurers have freedom to increase rate as they wish. The insurers cannot respond quickly enough.”

Unsurprisingly, this has led to a big increase in the excess and surplus lines market in the state. But it is a tricky risk for anyone to write. A lot of investment has been made in recent years to mitigation. But Walton stresses the limitations of this. “Most of the largest fires are wind driven and an ember can travel up to 2km. It doesn’t really matter how you protected our home, when the largest wind-driven fires hit, there is little you can do. And it is nearly a binary loss: either 100% or 0%. That also makes incredibly challenging to model.”

But there are things insurers can do – and which Howden Re can help with. Walton says much better tools and analytics are available to help clients understand the hazard risk – and their aggregation. “That is probably the most important thing,” he said. “You want to be writing a portfolio of risks where there is a geographical separation.”

It can also help to better understand insurance subrogation claims, which typically applies to cases made against utility companies in California blamed for starting these fires. This is a complex topic in its own right with the state having to form a fund to save some of its utility companies. “This is something we can help our clients measure” Walton says.

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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