According to a new report by AM Best, California wildfires have caused over $4 billion in commercial property losses for insurers in three of the past four years, with the expectation that 2021 fire losses could be even greater.
The report examined the worsening severity and frequency of wildfire events in California, and showed that direct incurred loss and related legal costs from commercial fire claims surpassed $1.1 billion in 2017, 2018 and 2020.
In those same years, combined losses for fire, allied lines, and commercial multi-peril (property) coverage exceeded $4 billion, compared with a high of $2.3 billion for any other year.
The report noted that eight of the 10 costliest US wildfires occurred in California between 2017 and 2020.
With record-breaking heat engulfing the western part of the United States in June and 98% of the land in western states experiencing drought conditions, this year’s wildfire season is about a month ahead of schedule.
“Based on current conditions, 2021 insured fire loss totals may exceed the losses of recent years,” said John Andre, managing director, North American Property Casualty.
Over the past few years, the insurance industry has encouraged and enforced more mitigation efforts by insureds, such as using metal or fire-resistant fencing, shoring up roofs and gutters, and cutting back vegetation and trees from the perimeter of the home.
Wildfire modelling has become more refined in recent years, enabling companies to make more informed underwriting decisions and reinsurance purchases.
In early 2021, California Insurance Commissioner Ricardo Lara proposed new rules requiring insurers to provide consumers with their properties’ wildfire risk scores.
Am Best believes that insurers must indicate any mitigation actions consumers could take to improve their rating, such as creating defensible space and fire-hardening, and give consumers time to lower their scores.
The new regulations will incentivise mitigation and help consumers make better informed decisions when they buy, sell, or build a home.
These changes will also provide insurance companies with more upfront certainty about the materials and information required in rate applications filed with the California Department of Insurance, eliminating delays caused by incomplete initial rate filings.
There are currently over 30 California regulatory/legislative bills/proposals related to wildfire that can be grouped into four main categories: mitigation incentives, penalties, funding, and cancellations.
David Blades, associate director, industry research and analytics added: “These proposals underscore the growing importance that lawmakers and creators of public policies are placing on wildfire risk and the damage it causes as events occur more frequently and become more severe in nature.”
