California wildfires to cause record losses: AM Best

Wildfire losses in California will reach record levels in 2018 after three different fires erupted in November and will force insurers to re-price and reassess their California exposures, according to AM Best estimates.

On November 8, 2018, three different fires erupted in California, two in the south (Hill and Woolsey) and one in the north (Camp). The Hill and Woolsey fires have claimed more than 95,000 acres and damaged or destroyed an estimated 376 structures. The Camp fire is now considered the deadliest wildfire in the state’s history. As of this report, all three fires were uncontained and continue to add to the historic number of acres burned and likely insurable losses in 2018, especially in the more expensive areas the Woolsey fire is affecting in Southern California, where some 57,000 structures remain threatened.

The number of acres burned in 2018 is already nearly double the 2017 total, the agency said. The last two years have each seen a greater number of fires than the running five-year average, and the total number of acres burned in 2018 so far is more than 2.5 times the five-year average according to CAL FIRE (California Department of Forestry and Fire Protection). This widespread destruction will be the main reason for historic 2018 insured losses in California.

The potential for historic losses in 2018 was already likely before the Woolsey fire ripped through the wealthier area of Malibu, which has a median home value of approximately $2.9 million. Also at risk are many commercial structures and locations in the area that are used in the film and television industry. Many primary insurers limit their exposure to high-value properties and cede exposure outside of their tolerances to reinsurers.

Insured losses stemming from the Northern California Carr wildfire earlier this year could reach $2.0 billion. This wildfire is already the seventh most destructive fire to ever hit the state, according to CAL FIRE.

Urbanization and growing population density in heavily wooded areas, as well as hotter, drier conditions resulting from rising temperatures and declining precipitation, are contributing to wildfires becoming an increasingly frequent peril for insurers and citizens of California, AM Best noted.

For homeowners and farmowners writers in California, direct losses incurred increased nearly four times in 2017, to $16.0 billion, compared to $4.2 billion in 2016. Much of the increase can be attributed to the 2017 fire season. The top 10 companies in terms of direct premiums written (DPW) accounted for 76.4 percent of market share in 2017, roughly in line with their 78.8 percent share of direct losses incurred. Roughly half the top ten companies had outsized losses compared to their market share, highlighting some geographic concentration and larger exposures to certain affected areas. Further, the 10 largest premium writers in California posted a direct loss & adjustment expense (LAE) ratio in 2017 that was on average 3.7 times higher than in 2016, in line with the industry as a whole, AM Best noted.

In contrast, total dollar direct losses incurred for commercial property insurers roughly doubled in 2017, which still constitute only around 20 percent of the losses reported on the homeowners/farmowners lines. Similarly, the direct loss & LAE ratio on average doubled for those companies reporting direct losses incurred of at least $1 million. Commercial insurers will likely have significant exposures to the 2018 wildfires.

Most large writers in California are larger national companies that started 2018 with adequate risk-adjusted capital, AM Best said. The catastrophe events of 2018 will likely cause significant earnings volatility and could stress some balance sheets. Insurers have responded to a certain extent to the wildfires of 2017, but the lessons learned from the 2018 events will again call for re-evaluation of their underwriting and risk management strategies. Additionally, the risk-scoring models insurers have been using to identify areas particularly exposed to wildfires and to better establish their risk appetite and tolerances will be severely tested, the agency noted. The new normal will also cause insurers to re-assess and re-price their California exposures, but they will have to contend with the regulatory pressures that accompany this highly publicized issue.

Among the most exposed homeowners/farmowners insurers in California by direct premiums written are State Farm Group (17.1% market share), Farmers Insurance Group (15.7%), CSAA Insurance Group (6.5%) and Auto Club Enterprises Insurance Group (6.2%), according to AM Best. These are followed by Liberty Mutual Insurance Companies (6.1%), Allstate Insurance Group (6.0%) and Nationwide Group (5.6%).

The list of top California commercial property insurers by direct premium is led by Farmers Insurance Group (16.3% market share), Travelers Group (8.8%), Liberty Mutual Insurance Companies (8.3%) and Nationwide Group (6.0%). The list also includes Chubb (5.7%), State Farm Group (5.1%) and Hartford Insurance Group (3.9%).

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