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As Wildfires Engulf Southern California, State Anticipates Changes to Market for Fire Insurance

by Precise Leads

December 19, 2017

California residents shouldn’t see an immediate spike in their homeowner insurance premiums, but new policies may be harder to obtain in the future.

After wildfires swept through Northern California’s wine country a little over a month ago, strong winds and dry conditions have stirred up similarly extensive blazes in the southern part of the Golden State. A spokesperson for the state’s insurance agency told CNBC that losses from this year’s wildfires have now topped $10 billion, with $9.4 billion of that total resulting from October’s Northern California infernos alone. The estimate does not take into account the still raging wildfires in Southern California, which the California Department of Forestry and Fire Protection (CAL FIRE) claimed were only 20% contained as of December 11th.

Hundreds of Thousands of Acres Lost

More than 1,000 properties have been razed by the Thomas Fire currently as of publication. With nearly 232,000 acres lost to the flames, it’s now the fifth largest wildfire in the state’s history.

CAL FIRE reports that another 25,000 homes stand within the fire’s path, forcing 98,000 Southern California residents to evacuation the region. Fortunately, the California Department of Insurance noted that those residents will be compensated for evacuation and relocation costs without being charged a deductible under most renter and homeowner insurance policies.

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If the policy includes an additional living expense (ALE) clause, displaced homeowners and renters are eligible to receive funds to cover costs associated with food, housing, transportation, furniture rental, relocation, and storage. California’s Insurance Commissioner Dave Jones, however, stressed that anyone ordered to leave their home should check with their insurance carriers and agents, since provisions may vary from policy to policy.

Rates Not Likely to Spike

Thanks to Proposition 103, which California voters passed in 1988, it’s unlikely that the state’s homeowners will see a sudden spike in premiums because of the wildfires. Under the terms of the law, insurers requesting a rate hike for property and casualty insurance, including homeowner insurance, must first obtain approval from the state’s insurance agency.

Nevertheless, Jones explained that this year’s wildfires could have a “modest impact” on rates because the risk will be spread over a 20-year trendline. “The insurers cannot take all of the losses associated with a catastrophe like this [year's wildfires] and dump it into next year's rates,” Jones said. “Instead, there's a catastrophe factor in the rate, which is a trend that looks back at catastrophes over the last 20 years.”

Jones added that some California homeowners may find themselves unable to obtain a first-time insurance policy, since carriers will likely become more selective in underwriting homes in the wake of this year’s wildfires. A carrier in California can decline to write a policy for certain structures and in certain areas if it deems it too risky.

“Even if a homeowner has fortified their home with fire prevention methods, cleared brush, the insurer may still decide that because of the location of the home, the topography, the wind direction, its proximity to large forests, that the particular home is one they don’t want to write,” Jones told KQED News.

If insurers take this more selective approach, it would apply only to new policies, as state law permits current insureds affected by the wildfires to renew their coverage. The state also offers a program for homeowners to purchase a “last-resort” fire insurance policy through the California Fair Access to Insurance Requirements (FAIR) Plan.

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