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Fire-plagued California won't let insurers 'cram' through big rate hikes in 2019: state regulator

CNBC logo CNBC 11/17/2018
Michael John Ramirez hugs his wife Charlie Ramirez after they manage to recover her keepsake bracelet that didn't melt in the fire and held a sentimental value as they recover items from their fire safe in the rubble of their destroyed home, after the Camp fire razed through Paradise, Calif., on Nov. 15, 2018. © Provided by CNBC LLC Michael John Ramirez hugs his wife Charlie Ramirez after they manage to recover her keepsake bracelet that didn't melt in the fire and held a sentimental value as they recover items from their fire safe in the rubble of their destroyed home, after the Camp fire razed through Paradise, Calif., on Nov. 15, 2018.

California's destructive wildfires could pressure home insurers operating in the state, coming as insured losses have the potential to approach around $6.8 billion from the current fires.

More than 9,700 homes have been destroyed in the catastrophic Camp Fire still burning in Northern California and as of Friday evening at least 71 were confirmed dead and more than 1,000 still unaccounted for. Further south in the state, nearly 800 structures were destroyed or damaged in the Woolsey Fire, a blaze in Ventura and LA counties with three confirmed fatalities.

The two big November fires in California follow the state's expensive fire season in 2017 when insurers were hit by underwriting losses of nearly $13 billion from wildfires and mudslides. Despite the big losses, the insurers won't be able to immediately pass along the cost to customers since the state has a highly regulated industry.

"They are not permitted to take all the given years losses and cram them into next year's rates," California Insurance Commissioner Dave Jones told CNBC in an interview Friday.

A state ordinance limits any immediate rate hikes and instead spreads repayment of property and casualty insurance payouts over the next twenty years. Insurers also have to justify their rate insurance increases to the state insurance regulator but are entitled to make what Jones calls a "modest profit."

"California wildfires are becoming more commonplace, and regulatory risk is on the rise," S&P Global Ratings credit analyst Brian Suozzo said in a report this week. "In addition, the tight California regulatory body could make it challenging for insurers to obtain adequate future pricing."

An aerial view of Paradise, California off of Clark Road on Nov. 15, 2018. The Camp Fire has burned more than 7,000 structures in Paradise. © Provided by CNBC LLC An aerial view of Paradise, California off of Clark Road on Nov. 15, 2018. The Camp Fire has burned more than 7,000 structures in Paradise.

According to S&P, it's "too early to forecast industry losses accurately, though we expect the magnitude of losses to be less than last year's events."

A report from Moody's Investor Service estimates losses could approach about $6.8 billion. A figure by Morgan Stanley put the estimate at closer to $4 billion.

Homeowners who live in what scientists call "wildland-urban interface" areas pay on average about 40 percent more for home insurance than people elsewhere, according to the state insurance commissioner.

Californians owing homes in high-risk fire areas of the state will likely continue to bear the brunt of future rate hikes. Homeowners also can expect additional instances where insurers decide not to write some policies.

"I would anticipate that we are going to see rates continue to go up in the wildland-urban interface area, based on the risk and the enormity of the losses," Jones said. "We're looking at a future where we're going to have more frequent and more severe fires, and that's already having...an impact on insurance availability and pricing."

In 2017, there were about 6,800 single-family homes that were completely destroyed by California wildfires, primarily during the October of 2017 firestorms that swept through Northern California's wine country region. The state insurance regulator estimates wildfires last year caused about $12.6 billion in insured losses.

"Obviously, 2017 was a very tough year from the standpoint of underwriting losses," said Jones. "And 2018 is shaping up to be an equally tough year."

The Camp Fire about 90 miles north of Sacramento incinerated most of the town of Paradise. The 146,000-acre blaze was listed at 50 percent contained as of Friday evening. President Donald Trump is scheduled to meet with some of the people impacted by the disaster on Saturday.

a group of people riding on the back of a truck: Workers check for gas lines amid the damaged homes from the Woolsey Fire on Filaree Heights Road in Malibu, California on November 13, 2018.© Provided by CNBC LLC Workers check for gas lines amid the damaged homes from the Woolsey Fire on Filaree Heights Road in Malibu, California on November 13, 2018.

"This is the deadliest and most destructive fire in California history," said Jones. "Sadly, this is the new normal for California. And it's only going to get worse because of climate change."

The Woolsey Fire, meantime, was listed as 78 percent contained as of Friday evening. At one point, more than 200,000 people were under evacuation order in Southern California.

S&P believes the U.S. property and casualty insurance sector as a whole can absorb losses from the two large wildfires, pointing out the industry "is well capitalized with record-high surplus levels reaching $761 billion as of June 30, 2018" along with after-tax profits of about $34 billion.

The state insurance regulator issued a report earlier this year that looked at what was happening in the wildland-urban interface areas where there are about 3 million homes. It concluded that insurers had rated about 1 million of them as "high" or "very high" risk.

"The way they're doing it is writing first-risk models," said Jones. "They will assign a fire score home by home. They are not red-lining entire areas or regions. It's more sophisticated than that."

Between 2015 and 2016, there was a 15 percent jump in non-renewals of home insurance for homes in high-risk fire areas. Some homeowners who couldn't secure insurance through other carriers have been forced to get it through what's known as the state's so-called Fair Plan, a basic insurance program with about 38,000 policies that was set up in the late 1960s in the wake of riots and brush fires in the state.

Jones said the said the state's Fair Plan can be viewed as a sort of "canary in the coal mine. We are watching their policy counts very closely, and we've seen them go up year to year by a couple thousand. It is becoming more challenging in the wildland-urban interface areas, but we're not at a crisis yet."

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