Wildfires leave California insurance market on edge of collapse

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The fallout from the Los Angeles wildfires for California's insurance market is still landing.

Before the fires started on January 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 had just announced on December 30 the completion of regulatory reforms intended to get private insurers to cover more residents, as the state's insurer of last resort, FAIR, already was pushed near its limit.

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 "Los Angeles Area Wildfires Will Cause Record Insured Losses; Solutions to Address Insurability Are Needed."

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 one-year moratorium on cancellations and non-renewals in wildfire affected areas, in effect from January 7. As of January 15, Morningstar estimates the damage from the fires will cost $30 billion. 

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."

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."