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California Wildfires Could Cost Insurance Industry Billions

by Precise Leads

November 1, 2017

Preliminary damage estimates for the recent California wildfires are dire, and they don’t account for the massive destruction to Northern California’s wine industry.

As the devastating wildfires in Northern California subside, insurers have begun to tally the massive insured losses they’ve caused. Although exact estimates vary, the total costs will ultimately reach well into the billions of dollars, with Moody’s projecting $4.6 billion in damages to homes, commercial properties, and automobiles. The rating agency used data from the California Department of Forestry and Fire Protection (CAL FIRE), which estimated that the 5,700 properties destroyed had an average value of $802,000.

About a week after Moody’s reported its estimate, catastrophe modeler RMS revised its initial assessment of $3 billion to $6 billion in insured losses to $6 billion to $8 billion. RMS updated its estimates based on CAL FIRE’s amended total of 8,800 properties destroyed by the wildfires. While its forecast addresses property losses, content damage, and business interruption, it does not account for auto or agriculture crop losses, both of which could further increase losses because of the fire’s disastrous impact on Northern California’s thriving wine industry.

Other industry experts weighed in on the wildfire’s probable loss total. Executive Managing director at Aon Benfield Analytics Dan Dick told Insurance Business that the fires could cost insurers and reinsurers $5 billion to $8 billion.

Adding up estimated residential, mobile home, commercial, automobile, and direct business disruption losses, catastrophe modeling firm AIR Worldwide predicts industry payouts of $2 billion to $3 billion. Like RMS, AIR excluded vineyard damage from its estimate; it also left out infrastructure and land destruction.

Bad Year for Wildfires

In its report, Moody’s noted that 2017 has proved a particularly harsh year for wildfires in the U.S. According to the Insurance Information Institute, raging fires have razed 8.5 million acres so far this year, mostly in states like California, where soaring temperatures and drier forests provide an environment conducive to wildfires.

Compounding the destruction is that many homes in California currently under construction are close to fire-prone areas, Kelly Pohl, a geographer at independent research group Headwaters Economics told CNBC. “That's happened in Northern California and could happen in a lot of places,” he said.

Pohl said that possible solutions could include using building materials that resist flying embers such as fiber-cement panels and fire-resistance lumber, limiting policies in certain areas, raising rates, or purchasing additional reinsurance.

Reaction from Insurers

Several major insurers have begun to process claims and assess the short-term financial impact of the wildfires. As of October 19, State Farm, the state’s largest homeowner insurer and sixth-largest commercial fire insurer, told Reuters that 3,200 homeowners and 1,110 auto policyholders had submitted insurance claims.

In its third-quarter conference call, Travelers CEO Alan Schnitzer said the insurer had halted its previously announced share repurchase plan in order to conserve cash while it handles claims from Hurricanes Harvey and Irma in addition to the Northern California wildfires.

A Farmers Insurance spokesperson told The Mercury News that company the has collected roughly 2,700 claims, mostly from insured homeowners. The insurer quickly boosted its claims staff in the area by 130. “We have had several relief sites open for customers to file their claims and speak with their agents,” said Farmers spokesperson Carly Kraft.

In an effort to accelerate the rebuilding process, Gov. Jerry Brown has that ordered the state’s zoning and planning laws be eased, but given the magnitude of the damage and potential labor and material shortages, Northern California faces a long road to recovery. A report from S&P Global Ratings said it “will likely take several years” for home and business owners to rebuild.

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