Lines of business impacted by the California wildfires may see an uptick in pricing which could trigger higher reinsurance costs as pricing for perils such as smoke, ash, and brush fire may have to be re-evaluated along will terms and conditions for replacement cost values and living expenses, according to A.M. Best.
Although A.M. Best believes insured losses from the late-2017 wildfires will be within risk tolerances and doesn’t anticipate rating actions, the rating agency advised carriers to rethink their wildfire exposure approach to meet the altered underwriting, risk management and regulatory challenges.
AccuWeather warned that the 2017 California wildfire season could result in an economic cost of up to $180 billion, after the Thomas wildfire added to the expected $10 billion+ insured loss from the October California wildfires.
According to the California Department of Insurance, the wildfires resulted in $9.4 billion in insurance claims, AIR worldwide placed insured loss estimates at $8 – $10.5 billion, while RMS estimates are in the $6-8 billion range.
By market share, many national carriers dominate the homeowners, farmowners and commercial property lines of business in California – these carriers will have their claims settlement processes tested by the wildfires.
According to the rating agency total limit losses, while still difficult given the level of destruction, make the claims process easier to settle, but partial losses, including smoke and ash claims, often present a longer settlement process which can strain the claims infrastructure.
In response to the number of severe events in 2017, insurers may employ more conservative capital management strategies and reinsurance partnerships.
Catastrophe models could also be updated to refine parameters which would lead to higher estimates of probable maximum losses (PMLs) and capital requirements.
As insurers take stock of their California wildfires losses and reevaluate risk, pricing, and capital management, A.M. Best said they’ll need to work closely with regulators to adjust pricing and terms and conditions.
The rating agency said that while a year like 2017 validates insurers’ vital role, it also underscores the need for prudence in capital and risk management.
For reinsurers, the California wildfires could result in rate increases in loss-affected lines.