How wildfires became a burning issue for insurance professionals

September 16, 2024 5:30 AM

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Climate change has increased the frequency and severity of wildfires, especially in the western part of the United States, with more than 2.6 million homes in the region at risk to wildfire damage this season according to CoreLogic's 2024 Wildfire Risk Report. Many insurers have dropped coverage in these areas because of wildfire risk, but those that are working with customers in these states are forging partnerships to streamline the claims process.

According to the recently released second-quarter findings of CCC Intelligent Solutions' 2024 Crash Course report, more frequent and severe weather events are resulting in a surge of higher auto insurance claims costs and longer repair times. The average total cost of repairs increased over 3% in the first quarter of this year compared to early 2023, a change which the report attributes to labor rates and parts costs. Electric vehicles (EVs) made up 2.4% of all repairable claims earlier this year, which is an increase of 1.6% from the same period last year, and the average EV repair cost is nearly 47% higher than non-EVs.

"Extreme weather events are increasing in severity, becoming major disruptors in the auto claims and repair industry," said Kyle Krumlauf, director of industry analytics at CCC and co-author of Crash Course, in a press release.

Individual homeowners can mitigate fire risk by ensuring a five-foot buffer around the home that removes any vegetation, trees or overhanging branches, grass, turf, wood fencing or flammable materials, according to information from Insurance Institute for Business and Home Safety (IBHS) and its Wildfire Prepared Home Program, as well as CoreLogic. Vehicles should not be stored in the buffer zone, as well, and the entire area should be clear. Maintaining a yard and deck within 30 feet of a home by clearing debris, replacing combustible deck furniture and preparing Class A-fire rated roofing, metal gutters and ember resistant vents is recommended.

Customers living in areas with increased wildfire risk are facing difficulty with insurance, with high premiums and a lack of options due to insurers not providing coverage in these areas. California Insurance Commissioner Ricardo Lara has created a Sustainable Insurance Strategy, based on the results of a negotiation with the insurance industry that had failed to get approval from the California state legislature. However, this strategy has been panned by consumer advocacy groups.

"To paint this as insurers selling coverage again, was a real scam," Carmen Balber, executive director of Los Angeles-based consumer advocacy non-profit Consumer Watchdog, told Digital Insurance's Michael Shashoua. "We learned from the text of the regulation that there is nowhere in the rules that specify insurance companies would be selling comprehensive policies to meet their commitments. This is another place where the text of the regulation does not match what the commissioner is presenting to the public."

"That means literally, we have an entire insurance strategy put forward by the insurance commissioner, that is the insurance industry playbook with zero benefit for consumers," Balber added. "We need the legislature to step in and bring California some real solutions."

Read more about how wildfires are affecting the insurance industry.

Philip Pacheco/Bloomberg

More than 2 million homes in the western US at risk for wildfire damage

CoreLogic's 2024 Wildfire Risk Report revealed that over 2.6 million homes in the western U.S. are at moderate to very high risk of wildfire damage this season. Over a million of these homes are at very high wildfire risk, and overall, the estimated total reconstruction cost is over $1 trillion. Wildfires have burned over 4 million acres this year, much higher than the national 10-year average of acres burned.

"In recent years, we've seen wildfires occur in unexpected places, reinforcing the need to understand the risk landscape and take mitigation action. Both insurers and consumers have a role to play to ensure adequate protection," said Jon Schneyer, CoreLogic's director of catastrophe response, in a press release. "These numbers may seem overwhelming, but research shows that mitigation efforts make a real difference in potential losses from wildfires. The good news is there are actions people can take to lessen the risk."

California, Colorado and Texas lead the 14 states at moderate or great risk of wildfires, sharing 70% of the risk. The Los Angeles metropolitan area leads the nation in the number of homes at high risk, with over 245,000 homes at risk of wildfires. The estimated total reconstruction value is over $186 billion.

Read more:

CoreLogic: 2.6 million homes at high wildfire risk

California Gov. Gavin Newsom surveys wildfire damage

California governor's office

Despite record wildfires in the West, bond ratings or pricing do not change

Two West Coast states are experiencing yet another record-setting year of wildfires. The Park Fire in northern California, which in August was the largest of 12 active fires, consumed more than 426,000 acres and ranked as the state's fourth-largest fire in the past two decades. More than two weeks after an arsonist started the blaze, it was only 34% contained. Oregon has lost 1.38 million acres to wildfires this year, and is on track to surpass 2012, its worst fire year in modern history, according to a report in the Oregon Capital Chronicle.

Fires are burning year after year, and so far, municipal issuers are largely not being penalized by either investors or the rating agencies, said Tom Doe, president of Municipal Market Analytics.

"If the investors aren't penalizing an issuer that has climate risk with higher yields and the rating agencies aren't taking actions to hurt ratings, they ought to be tapping the market now to protect against climate risks," Doe said in an interview with Digital Insurance.

Read more:

West's record wildfires haven't changed bond ratings or pricing

Firefighter holding hose toward raging wildfire

Kyle Grillot/Bloomberg

Insurers and policyholders discuss California’s Sustainable Insurance Strategy

Insurers are saying they need more leeway from the California Department of Insurance's proposed Sustainable Insurance Strategy, while advocates for policyholders and others affected by wildfires are saying the strategy doesn't do enough. Representatives of both interests spoke at CDI's June 26 virtual hearing on the strategy.

Seren Taylor, vice president of the Personal Insurance Federation of California, acknowledges that the strategy has ambitious goals which require more "certainty and expediency in the rate filing process," he said. Taylor called the framework "reasonable."

"We do have technical questions and concerns that need to be resolved to ensure any final regulation will operate in a manner that insurers can comply with to achieve the goal of a more stable insurance market that provides greater availability for Californians," he said. "It's not clear to us how an insurer can meet a commitment to achieve 85% of its statewide market share within two years, or maintain 85% of its market share for three years, if the defined distressed area is changing every year."

Read more:

Insurers and policyholders debate regulator's wildfire cat models strategy

AI-generated illustration showing aerial view of a flood-ravaged village with submerged houses.

Virtual Art Studio - stock.adobe.com

How extreme weather is affecting the claims and repair industry

Hurricanes, floods, hailstorms and wildfires are increasing in frequency and intensity on a global scale. Earlier this year, experts predicted an overactive hurricane season, urging communities to prepare for potential loss and insurers across lines to take a more proactive approach to catastrophic weather impacts through data-driven insights and technology. In the face of climate change, some carriers are adopting tools like internet-of-things tech, satellite aerial imagery and parametric insurance.

Risk Management Partners, a unit of Munich Re, recently announced a partnership with IT consulting firm CGI to help insurers reduce claims and increase profitability. Munich Re will combine its Intelligence Platform with CGI's climate risk mitigation offerings to provide insurers with a platform that enables data-driven decision-making.

"We are delighted to join forces with CGI in helping insurers address increasing climate risks," said Christof Reinert, head of Risk Management Partners at Munich Re, in a press release. "Climate change and the need to drive forward sustainability actions will continue to grow in importance, and insurers are looking for proven expertise and innovative solutions to respond to these trends. Our combined offering will deliver the comprehensive climate risk mitigation capabilities insurers need."

Read more:

Extreme weather is disrupting the claims and repair industry

Firefighters battle the Post Fire in Gorman, California

Kyle Grillot/Bloomberg

Insurer’s wildfire strategy criticized by consumer advocacy groups

The next step of California Insurance Commissioner Ricardo Lara's Sustainable Insurance Strategy, which is responding to insurers dropping coverage because of wildfire risk, will require insurers to account for property owners making wildfire mitigation efforts.

The details of the strategy show that insurers will not be required to charge affordable prices for coverage, may use secret algorithms to set prices and allow double-digit price hikes, according to Carmen Balber, executive director of Los Angeles-based consumer advocacy non-profit Consumer Watchdog.

"This piece of Lara's plan was supposed to be the one consumer benefit out of all of the moves that he is taking, at the behest of the insurance industry, to relax regulation and allow them to more easily and more speedily increase rates," Balber told Digital Insurance's Michael Shashoua. "This was supposed to be the one concession to consumers that the commissioner was promising to make insurance companies sell to us again."

Read more:

Insurers' wildfire protection plans take fire from consumer advocate