Huge home losses in Southern California could push rates higher, but the state will review requests.
Southern California’s wildfires, already among the costliest in U.S. history, could fuel higher property insurance premiums throughout the state, although it will be some time before the impact is known.
While claims in and of themselves aren’t supposed to lead to higher premiums, they are likely to prompt carriers to reassess risks as they calculate how much to charge consumers in the future.
And even though the fires are confined to Southern California, any increase in premiums could spread statewide because insurers look at an entire state’s claims experience when determining premiums for a particular region, experts said.
Asked about the likelihood of higher premiums, spokesman Omar Morales of the Insurance Information Network of California said, “I wouldn’t say it’s a given, but risk is definitely going to be reassessed after this. That always happens after a disaster like this.”
Yet state Insurance Commissioner John Garamendi said current premiums already are supposed to take into account the possibility of a big catastrophe like the wildfires. Garamendi, who has the power to limit or reject proposed rate hikes, said he would scrutinize any proposed rate increase based on the fires.
Although the homeowners insurance market in California is already tight – with carriers raising rates and limiting coverage – Garamendi said the wildfires might not be reason enough for higher rates.
“It is a tight market to begin with. But this particular catastrophe should not create additional problems,” he said. “They’re going to have to prove it’s financially necessary.”
However, Garamendi cautioned that his assessment is based on a midday Tuesday estimate of 1,100 destroyed homes, a number that could easily be eclipsed. One report Tuesday afternoon upped the damage estimate to 1,600 homes.
While insurance premiums already reflect the possibility of a disaster, often a big catastrophe catches the industry unaware, said David Russell, a California State University, Northridge, finance professor and author of a book called “It’s a Disaster.”
He said big disasters “are usually a little bit of a shock to the insurance industry, like, ‘Gee, we didn’t think it would be this bad.’
“These types of events typically awaken the sleeping premium giant,” he added. Insurers “are going to re-evaluate anybody who’s in harm’s way.”
It was hard to get a fix on the cost Tuesday. Gov. Gray Davis said damage could approach $2 billion. But insurance executives said the loss covered by insurance could be well below that.
“We’re probably looking at something under $500 million (in insured losses), but certainly more than $200 million,” said chief economist Robert Hartwig of the Insurance Information Institute, a New York-based trade organization.
Even at under $500 million, the Southern California disaster would rank among U.S. history’s worst fires. The costliest remains the 1991 Oakland hills inferno. It spawned $2.25 billion in claims, as measured in 2002 dollars, Hartwig said.
Hartwig said the latest fires by themselves probably won’t lead to higher premiums but could lead to an increase because they represent a broader trend “toward larger and more frequent wildfires.”
He said drought-like conditions and the continued suburban sprawl into rural, forested areas could cause insurers to take a second look at the premiums they charge in these areas.
“You have the migration of people into places that have been subject to wildfire for millennia,” he said. ” The difference is that now there are homes
in that area.”
Homeowners living in a dry, mountainous, woody area – even if it’s nowhere near the latest wildfires – “would expect a similar impact” on the cost of insurance coverage, he said.
Bill Sirola, spokesman for State Farm General Insurance Co., said rates are calculated in part on the whole state’s risk exposure, and in part on the circumstances of a particular region of the state. Fire-prone areas, such as the foothills, are more likely to feel the impact of the Southern California disaster, he said.
But he said it’s too soon to say whether rates will rise.
“Will it have an impact on rates? We’ll have to see what the final losses were, what our projections were,” said Sirola, whose company is the California unit of the nationwide insurance giant.
As for individuals who’ve had homes damaged or destroyed, the mere filing of a claim shouldn’t trigger a rate increase, Garamendi said.
Yet industry officials said carriers can and will raise rates if homeowners rebuild without making their homes safer.
“Insurers will cast a warier eye” on homes located in remote, hard-to-reach areas and are rebuilt with wood siding, Hartwig said.
By contrast, premiums in the Laguna area near Los Angeles didn’t rise after a 1993 fire that caused $466.9 million in insurance claims, the second costliest fire on record, according to Morales. The reason is that the community rebuilt with fire-retardant vegetation, improved road access for fire trucks and so on.
“That community is really a model,” he said.
Still, consumer advocate Doug Helle said he believed insurers would use the latest wildfires to push for unjustifiably higher rates.
“The insurance industry will look to exploit this tragedy to serve their interests, to push for rate increases,” said Heller, of the Foundation for Taxpayer and Consumer Rights in Santa Monica.
The Bee’s Dale Kasler can be reached at (916) 321-1066 or [email protected]
Costliest wildfires The worst U.S. wildfires, as measured by insurance losses:
Location / Date / Loss in 2002 dollars
Oakland hills / Oct. 1991 / $2.25 billion
Los Angeles County / Nov. 1993 / $466.9 million
Orange County / Oct. 1993 / $435.7 million
Santa Barbara / June 1990 / $364.8 million
Cerro Grande, N.M / May 2000 / $146.3 million
Rodeo-Chediski, Ariz. / June 2002 / $120.0 million
Oakland-Berkeley / Sept. 1970 / $115.0 million
Santa Barbara / July 1977 / $59.4 million
Source: Insurance Information Institute