This article is by Rory Yates, Global Strategic Lead, EIS, and it looks at the long term impact of the wildfires in the Los Angeles area;
The horrific scenes of the South California wildfires have been unbearable to watch, and the impact to land, property, possessions, and people is frankly unimaginable.
My heart, like yours I’m sure, goes out to friends, family and colleagues caught up in it all. It’s not even the season for this, but a combination of conditions led to a fast spreading and devastating fire. The smoke alone, far from the flames, has caused untold damage as well.
The weather played a huge part in this unexpected event. Gusty winds hindered firefighting efforts and quickly raised fears the flames could reach ever more populated areas. Unfortunately this happened, and many surrounding residents were told to flee. Homes, cars and precious possessions were abandoned, with no idea what will be there when they return.
To give a sense of the scale, there were three main areas impacted, the Palisades, Hurst and Eaton. At the time of writing at least five wildfires are raging – the two largest cover more than 27,000 acres. With an estimated 137,000 evacuated, and five pronounced dead.
Insured losses from J.P. Morgan estimated Wednesday (8th Jan) that the ongoing wildfires in Southern California could approach $10B, although that is a “very preliminary estimate to help investors gauge the likely impact on financials than to provide a precise impact of the likely claims.” Other estimates range as high as $24bn. Either way, it’s enough to potentially affect all Californians, and threaten insolvency for insurance carriers as well.
The J.P. Morgan analysts also stated that the most exposed carriers to the California wildfires include Allstate, with its market share in the state at 6%, The Travelers Companies and Chubb, to name a few.
Regardless, a lot of people will have lost everything. They will have to find the funds to rebuild, and hope their insurance and insurer will be there to support them. Many observers have already noted that this is not only a test of the industry, but likely another pivotal moment.
REGULATOR ACTIONS
At the end of last year, the state insurance commissioner implemented new policies to stabilize the industry, but those changes might not have come soon enough to protect insurers and the state from a fiscal catastrophe.
The changes to the rules governing insurance allow companies to factor catastrophic risk into their policies and pass on more costs to homeowners. This came into play as many insurers struggled after large scale fires in 2017 and 2018, which, according to the Insurance Information Institute, meant that the state’s insurance companies collectively paid out more than twice as much in claims and expenses than they charged in premiums.
Following insurers pulling coverage, these measures have seen homeowners largely replace their fire coverage with a state plan of last resort called the California FAIR plan, an insurance pool, which covers up to $3 million in damages for residential properties and $20 million for commercial ones.
It’s been reported that between September 2020 and September 2024, the number of FAIR policies for dwellings grew by 123%, to 452,000 policies. Homeowners with more expensive properties often get additional fire coverage from luxury insurers with costly surplus line policies.
Following these fires, we could also see everyone wanting to rebuild at the same time, so there will likely be a lack of builders and materials available. Insurers supply chains, claims management processes, and people will be stretched beyond belief in the recovery process.
STRESS TEST
All of these scheme measures and insurers will now be put to test, in the most horrifically scaled way possible. However, this is what insurance is for. It is there to help people, at least financially, when some of the worst moments in their lives are realised.
From this point forward we may well hear of short falls, missed expectations and devastated customers. It’s imperative and incumbent on the insurance industry to learn from these. What I will say now though is that I am also confident insurance will also be there for many, and provide much needed support in the days, weeks and years that follow.
What we will also need to do from here is build back better as an industry, work harder with government and schemes like FAIR, and work harder than ever to put more mitigation measures in place as well. Working with wider institutions of predictive weather data, data services like Earth Knowledge and integrating even more with IoT sensors & warning or prevention services, private fire services and emergency services.
We need to continue to adapt at an ever increasing pace, and build ever more resilient insurers and consequently more resilient customers as well.
My heart screams out to all those impacted, and especially to the front line who have put their lives at risk to contain this.
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