Wildfire & Insurance Facts: What We Know

The California Senate Committee on Insurance held an informational hearing on emerging issues with wildfires and insurance in March. Here are some key findings from that hearing.

• California homeowners and businesses have traditionally had broad access to high quality policies at relatively low prices that meet their needs under most conditions. Unfortunately, the insurance market in areas prone to catastrophic losses has become increasingly stressed.

• The 2017, 2018, and 2020 California wildfires set records for area burned, structures destroyed, and lives lost. Insurance companies incurred more than $30 billion in insured losses over these three years—sending a clear signal that the existing assessment of wildfire risk in prior years was incomplete and that California’s fire risks were grossly underestimated.

• Generally, insurance may be purchased from property casualty insurers in the “standard” market, meaning that the insurance companies admitted to sell insurance directly to California consumers who meet underwriting requirements.  However, there is also a “secondary” market, comprised of non-admitted insurers, who are permitted to sell policies not “available” in the standard market, and the California FAIR Plan, designed as a “residual” market of last resort. Both the residual market and the non-admitted market are back-up sources for coverage that tend to be more expensive and are not eligible for a variety of consumer protections that apply in the standard market.

• Massive growth of policies in the secondary market confirms that insurance has become less available on the voluntary market. Affordability concerns are high for consumers in the secondary market, especially those in the FAIR Plan, where an over-concentration of policies in any given area adds an additional cost to each individual policy in that area, known as concentration risk.  As availability in an area continues to worsen, the influx of new FAIR Plan customers is likely to increase costs for existing policyholders in that area and make those new policies more expensive than they would be otherwise.

• The California Department of Insurance (CDI) has published data on the number of new, renewed, and non-renewed homeowners policies statewide for years 2015-2019. Since 2015, the number of new policies issued by the voluntary market has increased each year, and renewals have remained remarkably level. Despite this, insurer initiated non-renewals spiked 31% in 2019 to 235,274 after three straight years of non-renewals in the 170,000s.

• The ten counties with the highest concentration of homes in high fire risk exposure were, in order:  Tuolumne, Trinity, Nevada, Mariposa, Plumas, Alpine, Calaveras, Sierra, Amador, and El Dorado. CDI reports that collectively, 65% of the homes are in high fire risk exposure based on modeling projections. In these ten counties, non-renewals jumped from 6,372 in 2018 to 19,282 in 2019, a 203% increase compared to the 31% increase statewide.

• On December 31, 2020, CDI released the final list of 563 zip codes that qualify for one year of protection from non-renewals; the total number of policyholders currently under moratorium is 2.4 million.

• FAIR Plan policies are not designed to replace standard coverage, are expensive and offer slim benefits. Residential policies are currently capped at $3 million (recently raised from $1.5 million) and commercial policies top out at $4.5 million. As of January 2020, more than half of FAIR Plan policies were written for less than $500,000 and only 14% of policies are for over $1 million. The Plan is now primarily a home insurer with a smaller share of commercial business; the Plan is prohibited from writing farm and automobile risks.

• The Legislature intended to keep rates low in as many ways as possible, including by only authorizing the FAIR Plan to offer a basic fire dwelling policy; it doesn’t include other perils that are offered in a typical homeowners (also known as HO3) policy. FAIR plan policyholders who want broader coverage must find excess or supplemental coverage called “differences-in-conditions” (DIC) policies. The coverages offered in a DIC policy are not influenced by fire risk, DIC policies are readily available on the admitted market, and costs may be lower than if the FAIR Plan developed and offered these coverages. For consumers who want the bare minimum coverage required to secure a mortgage, FAIR also offers a lower cost actual cash value policy that provides replacement cost insurance, minus depreciation.

• Prior to 2019, the FAIR Plan consistently wrote approximately 2,000 new policies per month, and around 300-500 customers per month would cancel their coverage, presumably because a more affordable policy was found in the standard market. However, starting in December of 2018, new policies issued increased almost every month, peaking at 9,033 policies written in October, 2019, and the number of policies being cancelled started dropping.  As of June, 2020, the last month for which data is currently available, the 316 cancellations were just 5% of the 6,378 new policies written. This suggests many fewer customers who turn to the FAIR Plan are able to get out as quickly as in 2015-2018.

• Several counties’ experience was much worse than the state average. For instance, Amador, Calaveras, El Dorado, Nevada, Placer, and Tuolumne, the 6 counties that saw the worst of the surge, ALL saw more new FAIR policies written in the first 7 months of 2019 than all the new and renewed FAIR policies from 2015-2018 combined. Data from CDI shows that nearly a third (32.5%) of all FAIR Plan policies written in 2019 were in the aforementioned ten counties.  New FAIR Plan policies in those counties totalled 24,326 in 2019, an 898% increase over the 2,437 written in 2018. Renewed policies also increased 118% in 2019.

• The other component of the secondary market are surplus lines insurers.  According to the Surplus Line Association of California, homeowners premium in California in 2019 totaled $232 million from 46,479 transactions. And total premium rose significantly–over 2018 by about $122 million.  In its Annual Report 2020, SLA reports that from 2019 to 2020, homeowners premiums increased by approximately 15% and commercial property premiums increased by approximately 50%. Average premium for new and renewal policies has increased from less than $13,000 in 2017 to over $18,000 in 2020.

• One third of California’s land is covered by forests. Ten million of those 33 million acres are owned by individuals, the great majority of which own less than 50 acres. 129 million trees have died since 2010 due to drought and bark beetles, and as of 2018, the U.S. Forest Service reported that 6 to 8 million acres of California land it manages was in need of immediate thinning and restoration. Prescribed burns are a highly cost-effective and beneficial land management tool; increasing its use to mitigate risk in California has been a subject of recent focus.

• The golden rule in insurance is that rates must match risk. Therefore, homeowners’ and businesses’ insurance rates will be tied to the success of California’s efforts to decrease wildfire risk. Due to low cost, expanded use of prescribed burns could become an important tool in that fight. In a strange twist of irony, the standard market insurance availability crisis has helped advance the idea of increasing prescribed burns to mitigate risk, only to be stalled by another availability issue:  lack of liability insurance for the companies conducting the burns.

• California’s commercial farms and ranches have reported increased numbers of insurance non-renewals and cancelations over the last several years. California’s wildfires have encroached upon agricultural lands with increasing regularity and intensity. The 2020 LNU Lightning Complex and Glass Fires in Napa County caused more than $175 million in agricultural damages, with agricultural infrastructure losses exceeding $35 million dollars. Vineyards, orchards, grazing lands, agricultural infrastructure, and livestock have been killed or completely destroyed.

• While agriculture infrastructure losses are smaller than those for residential and other commercial properties over the last several years, it appears that the aggregated loss of all property and property risks could be driving non-renewals across several lines. Several counties are experiencing both commercial and homeowners availability problems. The California Farm Bureau Federation has reported that 500 hundred farmers in Napa, Sonoma, Monterey and San Luis Obispo counties have been unable to renew their insurance policies since 2019.

• California has over 25 million acres of farmland, most of which is in the low fire risk central valley. However farmers, ranchers, and growers in the central valley foothills, central coast, inland southern California, and wine country are now struggling to find coverage. Unlike homeowners and many business property owners, farming and ranching operations do not have access to basic property insurance provided by the California FAIR Plan. If a farmer is unable to find insurance on the private market and lives on their farm, the FAIR Plan can only offer coverage for the home, leaving surplus line insurers as farmers’ only option for commercial property coverage.

If you have questions, don’t hesitate to contact us.