California wildfires are ‘new normal’: AM Best

California wildfires have hit the headlines, but the problem so far in 2019 is less than in previous years, and the bigger insurance companies operating in California should have adequate resources to cope, according to ratings agency AM Best.

“Although it is too early for any type of loss estimates, we note that much of the market share in California is held by the larger national companies with significant capital to manage this peril and effective risk management strategies, including robust reinsurance programs,” said AM Best.

“Given the activity of the last several years, many companies have heightened their focus on managing this risk with pricing, re-underwriting, and improved risk scoring matrices. Changing books of business may take years to implement. “

The record-breaking 2017 and 2018 California wildfire seasons put many P/C insurers to the test, notes AM Best, adding that the Insurance Information Institute estimated insured 2018 wildfire losses at more than $15 billion. These losses were spread among primary insurers, global reinsurers, and the retro markets.

AM Best said the 2019 season has been quieter, as the number of burned acres is at this point well below the number reported for the same period in 2018, but this could change very quickly. The northern California region is bracing itself for more adverse weather, as experts predict that the greatest fire potential will occur from October through December as the Santa Ana winds pick up.

This “new normal” trend continues to challenge insurers, regulators, and government agencies, as the separation between wildland and urban areas diminishes, often compounding the severity of these fires, said AM Best. Exact figures are difficult to come by because of the multiple jurisdictions involved — federal, state, and local — depending upon location.

Insurers have traditionally used a variety of risk management tools to mitigate wildfire risk; since the 2017 and 2018 events, companies have taken further steps to manage their exposure. These actions include stricter underwriting practices with respect to new business with identified wildfire exposure, reducing concentrations of risk in wildfire-prone areas, and leveraging internal and external resources to model risk as well as reinsurance solutions, where available.

With admitted carriers becoming more reluctant to offer insurance, more excess & surplus carriers with freedom of rate and form have entered the market, noted the agency. The residual market, the California FAIR plan, may also have to step in. Furthermore, in July, state lawmakers approved a measure to create a $21 billion fund that state utilities can access to help pay for damages caused by wildfires. On October 24, the California Public Utilities Commission approved a mechanism to fund the bill.

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