Fires deliver huge hit to insurers;

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Industry says it’s too early to tell whether rate increases will be needed to cushion blow

Alameda Times-Star (Alameda, CA)

While the devastating wildfires in Southern California are certain to result in thousands of insurance claims by homeowners, it’s too early to say whether insurers will have to raise rates statewide to cover the losses.

Some consumers groups think insurance carriers will eventually have to raise premiums.

The insurance industry says it’s impossible to gauge future premiums at this time and that one-time catastrophic events aren’t the only factor used when setting premiums.

“This is an event in progress. There is no way I could even comment on that. No one really knows what the tab will be,” said Jerry Davies, spokesman for the Personal Insurance Federation of California, which represents insurance companies.

The nine fires have killed at least 18 people and destroyed more than 2,100 homes. They have burned more than 860 square miles and forced as many as 50,000 people to flee their homes since a week ago.

If insurers do seek premium increase, they will have to get approval from the state Department of Insurance.

“Homeowners and renters in the state have paid a small portion of homeowners [insurance] premiums and renters [insurance] premiums in anticipation of a catastrophe such as this,” said Insurance Commissioner John Garamendi, adding that his office will look very closely at any rate hike requests. “We’ve been paying a lot. The question is, ‘Is it enough?'”

California homeowners paid on average a yearly premium of $592 for homeowners insurance — the ninth highest in the nation — compared to a national average of $508 in 2000, according to the most recent statistics available from the Insurance Information Institute.

Doug Heller, consumer advocate with the Santa Monica-based Foundation for Taxpayer and Consumers Rights, said talking about the possibility of rate increases is the last thing he expects insurers to do at this time.

“It would be too transparent,” he said. “But the fact is, no doubt they have underwriters in the insurance buildings developing a new model for a rate hike or to justify a rate hike.”

The fires could end up costing insurance companies up to $1.25 billion once the blazes are finally put out, according to an estimate by Richard Clinton, president of Oakland-based Eqecat Inc., a division of ABS Consulting Inc., which does extreme risk-management consulting for insurance firms.

By contrast, the 1991 Oakland hills fire, which burned about 3,000 homes and caused 25 deaths, resulted in about $1.7 billion in insured losses.

Fitch Ratings estimates that insured damage could range from $500 million to $1.25 billion from the Southern California fires.

To date, 2,777 homeowners and auto insurance claims have been filed, according to the Insurance Information Network of California. State Farm Insurance has seen more than 900 homeowners claims filed.

“This is going to be a huge hit to the insurance companies,” said Ken McEldowney, executive director of San Francisco-based Consumer Action. “I would certainly anticipate they would be trying to get rate increases in the future.”

Not necessarily, says the industry.

“No single event is going to have any significant impact on rates. Let’s make that clear,” said Bill Sirola, spokesman for State Farm, which is the largest provider of homeowners insurance in California with 1.4 million policyholders.

“Our rates are developed with a certain catastrophic amount built in. This won’t show in our data for a couple years.”

While there is uncertainty as to whether insurance carriers will have to raise rates, the insurance industry is urging consumers to make certain they have adequate homeowners coverage. Although insurers do make yearly increases in premiums to account for inflation, it’s up to homeowners to periodically review whether they have enough insurance to cover a home’s actual value.

“It’s critical to talk to your company or agent every year or two,” said Candysse Miller, executive director of the Insurance Information Network of California.

“If you’ve done a major remodel of your kitchen, your insurer has no way of knowing that unless you call them,” she said.

Also keep in mind that after the Oakland hills fire, the insurance industry phased out guaranteed replacement policies that covered the entire cost of rebuilding a home. Policies now set an upper limit for replacement costs if the home is burned down. For example, if a home is insured for $200,000, the upper limit for replacement would be $240,000, even if it costs $300,000 to rebuild the home.
Eve Mitchell can be reached at [510] 206-6474 or [email protected]

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