The fallout from the Los Angeles wildfires for California's insurance market is still landing.
Before the fires started on Jan. 7, the property insurance market was already on shaky ground, with State Farm, Farmers and Allstate having canceled or not renewed homeowner policies, and suspending new coverage.
The state's insurance regulator
The possible progress from state Insurance Commissioner Ricardo Lara's Sustainable Insurance Strategy plan has been upended by the wildfires, according to Patrick Douville, vice president for global insurance and pension ratings at Morningstar DBRS, the firm's global credit rating agency. Douville co-authored a commentary titled
Lara's plan "was a step in the right direction," Douville said. "But they're talking about freezing premiums again and preventing non renewals. Now because of these losses, they're taking a step back. But if you're taking a step back at the same time as the industry is facing record losses, that's not going to work."
It's not clear whether the non-renewals before the LA wildfires reduced insurers' exposure enough, according to Douville. The most recent non-renewals could mitigate the impact of the catastrophe, he added, but mean more of the losses are not covered, he added. Lara issued a
Estimating how much or how little of the losses are covered also has to account for what properties were covered by FAIR, what properties had dwelling fire coverage, and what properties had no insurance at all, according to Tom Larsen, senior director of research solutions at CoreLogic, a property data provider. Dwelling fire coverage, Larsen said, is "an inferior policy for the homeowner. They get less compensation, because not everything is as well covered."
Other items to consider for a complete calculation of insurance losses, according to Larsen, include whether the Eaton, Palisades and six other smaller fires will be treated as one event or many, and damage the fires cause by destabilizing land. That can contribute to landslides and flooding in the future, as has happened with previous wildfires, Larsen noted. So damage from such subsequent events would be treated as damage from the wildfires as the root cause. In that case, the homeowner would be compensated even if they didn't have flood insurance.
The pre-existing conditions of the California insurance market make it tougher to get support for more available and affordable insurance coverage, or for the state's FAIR plan, Douville explained. "The regulators in California really wanted this to be an industry solution," he said. "We've seen in these situations where you would try to ultimately get the next cohort of policyholders or future premiums to pay for it. For that to happen, you need a healthy insurance market, which is not the case right now in California."
The FAIR plan covers 5% of properties in California, which is "already too high," Douville said. "If you get to 10% of properties, the whole market is going to collapse."
There is one possibility, however, that could help keep the FAIR plan going, as Larsen explained. The plan has a $3 million cap on what it will pay residential policyholders in a natural disaster. That leads many of these policyholders to also buy surplus lines insurance to increase their coverage, so not all the claims compensation will fall on the FAIR plan.
"In the Palisades area, there are many homes that go beyond $3 million," he said. "So the FAIR Plan will only be taking a fraction of the losses, even in the homes that they insured."
Still, the Sustainable Insurance Strategy plan will need rate increases "across the board," Douville said. "That's going to be an affordability issue for homeowners. Some homeowners probably cannot afford the true economic costs of that protection," he said. "That might be a political issue."
