Industry observers say damage payouts shouldn’t pose any difficulty, but the weak global economy could lead to eventual premium increases.
Once again, thousands of Southern Californians reeling from days of
destructive wildfires have been forced to exercise the home insurance
policies they hoped they would never have to use.
That it comes at a time of global financial crisis raises a new set of
questions: how healthy are the insurance companies that protect
homeowners in a region continually battered by fires? And will the
current economic climate result in higher premiums?
It may be months before those questions can be fully answered, but
several industry officials and observers said Monday that it was
unlikely that insurance companies would go under the way banks have.
After years of booming profits and a general aversion to risky
investments within the property casualty arms of their companies,
insurers are well capitalized to handle the latest fire claims and are
not as vulnerable as other financial institutions, several experts said.
"The majority of those who lost their homes do not need to worry about
the solvency of companies they’re insured with," said Amy Bach,
executive director of United Policyholders, a San Francisco advocacy
group. "They’re all reasonably solvent and perfectly capable of
covering all these claims."
Even American International Group Inc., the massive insurer that needed
a $150-billion federal bailout from losses stemming from the real
estate crash, said that it was comfortably honoring its policies.
"AIG’s insurance companies are well-capitalized, separate legal
entities that are regulated by the states," said Peter Tulupman, a
company spokesman. "AIG’s issues have not altered our underwriting
process or ability to write risks."
But some watchdogs are more skeptical and believe the cost to consumers
will come eventually — though perhaps long after the fires are
"These fires, as devastating as they may be, are already built into our
premiums," said Doug Heller, executive director of Consumer Watchdog.
"The fact these fires are happening during an extraordinary economic
downturn is more of a concern. That’s because the insurance industry
makes its profit by investing our premiums. When interest rates are low
and bond markets are producing inconsistent returns and the stock
market is down, insurance companies make less money."
Heller believes insurance companies are understating their investment
loses after the subprime meltdown and will eventually try to recover
those losses by raising rates.
That won’t be easy in California. In order to raise premiums here,
insurers would have to prove to the California Department of Insurance
that they sustained losses over at least a three-year period.
"An event like these fires does not cause significant increase in
rates," said Samuel Sorich, president of the Assn. of California
"The formula for rate filing and rate review looks at a trend in losses over an extended period of time."
Insurers are also encouraged to invest property casualty policies such
as home and automobile insurance in more conservative areas such as
Doing so maintains liquidity for the insurers, and state regulators
have the option of revoking licenses of firms that invest recklessly,
said Darrel Ng, spokesman for the state insurance agency.
In the last year, some insurers have reduced rates. Allstate Corp.
dropped homeowner rates by 28.5% after it was found to be overcharging
Mercury General Corp. dropped automobile insurance rates by 3% and
homeowners insurance by 10% — a move that was estimated to save
Californians $41 million a year.
The rate cuts came after a series of highly profitable years for
insurers when the rate of auto accidents decreased, Sorich said.
"Because of the good years, they’ve been building up capital strongly,"
said Robert Hunter, director of insurance for the Consumer Federation
of America. "I don’t think we’ll see a remarkable number of
insolvencies. Will rates go up? It’s possible. But lately, rates have
been going down."
Where to find help — Sources of state aid for wildfire victims:
One-Stop Local Assistance Center, East Anaheim Gymnasium, 8165 E. Santa Ana Canyon Road: (714) 765-3100, beginning at 7 a.m.
Aid information is available here regardless of residence. Other local centers are expected soon in Santa Barbara and Los Angeles counties.
State Supplemental Grant Program, California Department of Social Services: (916) 651-8848.
State Department of Insurance: (800) 927-4357 or http://www.insurance.ca.gov.
Pierson is a Times staff writer. Contact him at: [email protected]