Blog - Tag: wildfire
New Rules May Coax More Insurers Back into California Market
In an effort to bring more insurers back into California’s homeowner’s and commercial property insurance market, the state Department of Insurance (DOI) has approved a system that will allow insurers to use forward-looking wildfire risk models to price policies in areas susceptible to wildfires.
The DOI hopes this and other measures it’s been taking, will provide some relief to businesses and homeowners in high-risk areas. Up until this point, insurers have been barred from using risk models that predict future wildfire claims costs and instead have been forced to use historical data.
Insurers have been pushing for this change for years, saying restrictive regulations have kept them from adequately factoring in wildfire risk.
What these models do
The DOI in August established the Pre-Applications Required Information Determination (PRID), a process that insurers can use to get their predictive models approved.
“The PRID process has introduced the potential for bringing relief to the many insurers who have struggled to provide coverage across California,” the DOI said in a press release. “With the ability to use more innovative risk forecasting model technologies, many carriers may return to provide coverage in the wildfire prone regions of California.”
Through PRID, the DOI has already approved prospective wildfire models, created by three companies, that insurers can use to price policies in the Golden State.
One such wildfire model was created by the risk-modeling company Verisk, which uses decades of wildfire science, engineering expertise and climate data to provide a forward-looking view of risk.
Another model approved through PRID is by Kimberly Clark & Co. That model, which has already been accepted in 24 other states, incorporates the impacts of climate change and accounts for mitigation efforts at property and community levels to encourage the reduction of wildfire risk.
What it means for the market
This could give homeowners and business owners more options in areas where it has been difficult or impossible to find coverage in the private market. The DOI is requiring insurers that use the new models to also commit to writing more policies in wildfire-prone regions.
With the new models in place, Mercury, Allstate and CSAA have announced plans to write more property insurance policies in California.
Rates are likely to shift as insurers adopt the models. Properties in areas shown to be at higher wildfire risk may see premium increases, while those in lower-risk areas or where fire-safety measures are in place may benefit from discounts.
Other changes in the works
The wildfire models are part of a larger effort to improve California’s strained property insurance market. Other steps include:
Expanded discounts for mitigation: Homeowners and businesses can qualify for premium reductions by taking specific wildfire safety steps.
Temporary FAIR Plan expansion: The FAIR Plan has raised its commercial property coverage limits from $10 million to $20 million for single facility and up to $100 million for a multi-unit property.
Reinsurance reforms: Insurers will be able to better manage their exposure to catastrophic losses, which regulators say should help keep the market stable.
Takeaway
For homeowners and businesses, these changes mean more choices may soon return to the market.
Prices will likely vary more widely depending on location and wildfire readiness, but insurers may start competing again to write policies in parts of the state where coverage has been scarce.
How to Prepare for Blackouts During Wildfire Season
During wildfire season, utilities with equipment in at-risk areas will often cut power during high-wind events to reduce the risk of ignition from downed power lines.
While the practice can prevent a fire from starting, it can put businesses in a bind by hampering operations and even putting perishable items at risk of spoiling if the outage lasts for an extended period.
With the specter of multiple-day power outages always looming during wildfire season, businesses need to be prepared to keep their operations going and prevent losses that may not be covered by insurance.
Fortunately, businesses can take steps to ensure resilience and the ability to function during power outages, especially if they last a few days. The following is good advice for any business since blackouts can also occur during heavy storms and natural catastrophes which can hit anywhere.
Identify business processes that would be most affected
These processes will differ from business to business, but once you put them all down on paper, it will be easier to plan how to keep those functions going.
Create a continuity plan
Once you’ve identified your key processes, brainstorm how you can keep them going without your typically reliable power supply.
Write up an emergency response plan and share it with employees so they know what to do in a power outage and the steps to take to protect equipment. Employees should also know where to exit the building if they need to evacuate.
As part of your plan, build an emergency kit and include first aid supplies, flashlights, batteries, water, nonperishable food, safety gloves, a battery-powered radio and anything else your business might need.
Set up a backup power system
Consider investing in a backup generator that is right for your business needs. With a generator, you can continue to run critical aspects of a small business during a power outage. This is especially important if you have perishable inventory, like a restaurant, food distributor or grocery store, to avoid spoilage.
Make sure to keep backup generators and fuel in a safe location. Generators need to be used with adequate ventilation to avoid the risk of carbon monoxide poisoning. Never use a generator under wet conditions and always let them cool off before refueling.
Cloud storage and Wi-Fi
If you have not done so, you should secure a means of paperless document and file storage in the cloud. If there is a power outage and an accompanying surge, you could quickly lose your data.
You should also prepare a system of battery-powered mobile wireless hotspots that connect via cell towers, so that even when the internet goes down, you can finish important tasks requiring web access, such as setting up an e-mail auto-response.
Protect your electronic equipment
Equipment that contains sensitive components and plugs into a wall outlet, like a computer, could benefit from a surge protector, which protect them from the powerful rush of electricity when the power comes back on.
Buy an uninterruptible power supply unit
This is essentially a portable battery with power outlets, allowing you to plug in electronics and continue using them during an outage. They come in numerous sizes, and the more they cost, the more power they can store and deliver.
Some of these units can supply power to a small building, and you may be able to purchase a solar panel that can recharge the unit.
Invest in the right insurance
If you’ve got business interruption insurance, you may be covered for losses related to the outage, but it all depends on the specific wording in your policy. The cause of the outage might matter, and your coverage might only kick in if the outage lasts for a certain duration.
However, if the loss is the result of a power outage due to the public utility, you may not be able to get compensated for these losses by a business interruption policy. Also, while most commercial property policies include business interruption coverage, it only kicks in in the case of physical damage to the property.
That said, some policies cover power outages by default. If you are in a state that is susceptible to wildfires and there is a possibility of blackouts by your public utility, give us a call to discuss your current coverage.
Expect to See Surcharges on Your Policy for the L.A. Fires
Even if you have a business or a home that was not affected by the recent wildfires in Los Angeles, you will likely see a surcharge to help pay for them on your next property insurance policy renewal.
The state-run California FAIR Plan, which is the market of last resort when policyholders are unable to find coverage from private carriers, expects its total loss from the Palisades and Eaton fires to come in at $4 billion.
Under its charter and state law, if it exhausts its funds, the plan can surcharge all commercial property and homeowner’s insurers in the state after approval from the state insurance commissioner.
Commissioner Ricardo Lara approved the Fair Plan’s request in early February to surcharge insurers a total of $1 billion, which will be assessed depending on each insurer’s market share. Under state law, those carriers are allowed to pass half of their assessment on to their policyholders in the state. It’s unclear how much each policy will be surcharged, but the fee will partly be based on the size of each policyholder’s annual premium.
Without the assessment, the FAIR Plan would run out of funds by the end of March and be unable to pay all of the claims from the fires, as well as claims from unrelated or future events and operating expenses, including the cost of increasing staff to respond to the disaster.
The state of play
The L.A. fires are one of the costliest natural disasters in the history of the country. Consulting firm Milliman estimates that the wildfires will cost $23 billion to $39 billion in insured losses.
As of Feb. 11, the Fair Plan had paid out about $800 million in claims, leaving it with about $1.2 billion in cash on hand.
It has also tapped reinsurance, which is basically insurance for insurance companies. It has multiple layers of reinsurance, but it cannot access all of them until it spends more of its funds on claims. It now has access to the first tranche of coverage worth $350 million after it met its $900 million deductible.
The FAIR Plan can access additional layers of reinsurance based on the claims incurred and outstanding reserves up to a $5.78 billion limit. To access all layers of available reinsurance, the plan would have to pay out about $3.5 billion, including the $900 million deductible, and copays. That’s more than its cash in hand.
After accounting for its reinsurance package, the FAIR Plan expects to pay out $2.3 billion of the remaining $3.1 billion reserved for unpaid losses from the fires.
How it will affect your policy
To help the plan pay for the $1 billion shortfall, it will surcharge each property insurer in the state based on their market share two years prior to the assessment. Every carrier that sells commercial property and homeowner’s insurance in the state will be assessed.
Here are the market shares of the top 10 insurers in 2023, the year assessments will be based on:
- State Farm 19.7%
- Farmers 14.7%
- Liberty Mutual 6.5%
- CSAA 6.4%
- Mercury 6%
- Allstate 5.7%
- AAA of Southern California 5.5%
- USAA 5.3%
- Travelers 4.3%
- Nationwide 3.1%