The devastating wildfires that have plagued California in recent years have become a focal point for insurers and reinsurers, forcing them to reassess their approaches to underwriting and pricing, according to Gallagher Re – 2023 US Wildfire State of the Market report.
The size and frequency of these destructive events, coupled with the looming threat of a major earthquake, have positioned California as one of the most critical geographies for the insurance and reinsurance industries.
The impact of historic wildfire activity in 2017 and 2018 has reshaped how companies perceive California from both an underwriting and pricing standpoint.
Recent wildfire losses have elevated the state to one of the top four in terms of total catastrophe loss over the past five years. This, combined with the growing concern over the increasing frequency of damaging wildfires, has prompted insurance companies to implement changes to their non-renewal, rate, and underwriting strategies to ensure a sustainable expected loss ratio and effectively manage the rising costs of reinsurance.
One significant development in the market is the expansion of the public insurance sector. The California FAIR Plan, which provides coverage for those unable to obtain insurance through traditional means, has experienced a surge in policies since 2019, with over 100,000 policies being issued.
This growth reflects a shift in appetite from the traditional insurance market, directly correlated to the escalating risk of wildfires.
Meanwhile, the reinsurance industry has undergone significant changes since 2017. Historic levels of losses from wildfires, hurricanes, and other natural catastrophes have led to a substantial increase in reinsurance rates, higher retentions, and more stringent contractual terms.
Following the January 1, 2023 renewals, property reinsurance rates have risen by over 60% since 2017, directly impacting insurers’ overall profitability and potentially leading to higher rates for policyholders.
The current market environment is characterized by limited capacity and high prices, combined with a heightened wariness among reinsurers regarding wildfire exposure. Consequently, insurance carriers must adopt robust underwriting and portfolio management approaches to wildfires.
Those with well-developed wildfire pricing, underwriting, and portfolio management strategies are better positioned to secure additional capacity and lower prices compared to those with less refined approaches.
The 2022 US wildfire season witnessed the burning of 7.5 million acres, with Alaska accounting for 3.1 million acres alone, while a total of 68,988 wildfires were reported, resulting in the destruction of 2,717 structures and causing an estimated economic loss of $3.0 billion and insured loss of $500 million, both below the 20-year averages.
While the number of acres burned in the 2022 wildfire season was consistent with the long-term average, concerns about potential damaging wildfires remain at an all-time high, the report noted.
California reported 772 destroyed structures in 2022, while in 2023 so far there have been no destruction in structures reported and no fatalities, according to data from Cal Fire. There were 1,392 wildfires reported and 2,670 acres burned. The Ramona Fire caused the most damage with 348 acres burned but contained, while Johnson Fire and Nob Fire are still active wildfires.
