Recent storms in California have caused heavy flooding in the state resulting in significant economic losses, many of which may not be insured, warned David Blades, associate director, industry research and analytics at AM Best.
He stated: “After long periods of drought in California over the past couple decades, the state now has seen its second-straight year of destructive flooding with mudslides.
“The economic losses from the latest round of storms will be significant and many of these losses may not be insured. Just 2% of California residents have purchased flood insurance, which leaves 98% uninsured.”
According to Blades, these flooding events will shine a spotlight on private flood insurance in California, which despite the low take-up of private flood insurance, is still the second-largest state in private flood premium, trailing only Florida.
Private flood insurance accounts for almost 50% of California’s entire flood market, a much larger share than other leading states for flood insurance. Additionally, it accounts for 4% of policies from the National Flood Insurance Program (NFIP) as well.
Blade notes that, even with the NFIP insurance, many homes in California are likely underinsured. The NFIP insurance is limited to $250,000 per residence, a figure that is well below the median home value in the state, which is near the top in the United States.
“The problem of flooding has been exacerbated by the rising number of homes being built in floodplains and the resulting diminishing runoff areas, leading to greater water accumulation. Population growth in wildfire-prone areas in California and other western states also has led to higher economic and insured losses, despite less intense natural catastrophes,” Blade explained.
He continues: “With last January’s storms, the state’s insurance commissioner reminded insurers of their legal duty to cover damage from mudslides under a homeowners or other property policy in the event one is triggered during a flooding event on a hillside weakened by wildfires. The law was put into place following the 2018 Montecito mudslide that claimed 23 lives. Typically, mudslides are excluded from standard policies and covered by flood.”
Climate-related risks are changing the risk assessment landscape for property insurers, and the early 2023 and 2024 storms in California are just one example, the analyst highlights.
Blade stated: “Underwriting and pricing property risks based on prior experience is proving to be unwise because catastrophe models, despite recent updates, do not yet fully take into account the full, evolving scope of property catastrophe risks reflected by these newest storms, and what is becoming the new normal.
“Natural and weather-related catastrophes have traditionally posted the most severe risks for property insurers, but the frequency of these severe events, their varied nature and the resulting financial losses have made accurately re-assessing the nature of these risks more critical.”
With changing weather patterns posing growing risks to the profitability of property insurers, many of them have announced their intention to pull back from or exit California’s market in 2023.
Others, in order to continue writing business, have secured sizable rate increases in more recent months.
“Reinsurers must contemplate their risk selection and risk aggregation strategies as well in this market, and these continued events could cause capacity to retreat from property risks in the area. All this has led to rising availability and affordability issues for consumers,” Blade concluded.
