All Fired Up

Posted on November 4, 2020 by Chip Merlin

Massive California wildfires proliferate, sparking high-stakes risks for insurance companies

Get ready for the big one! That’s been a long-standing joke, albeit a jest uttered with an underlying foundation of fear when the denizens of California refer to the likelihood that a giant earthquake will shear the state off from the rest of the continent in a cataclysmic geological event that will forever change the world.

The sad thing in 2020 is that we don’t need a supersized temblor or a sky darkened with ravenous locusts to feel like we’re in a very strange place. Let’s just take August as an example, and put the coronavirus aside. An extreme heatwave hit the Golden State, causing widespread rolling blackouts as Californians cranked up the AC to keep cool and utility companies cut power to avoid overloading the grid. Then more than 12,000 lightning strikes in 72 hours touched off hundreds of wildfires in drought-stricken areas in northern California. Two of the fires ranked among the largest in state history.

Wildfires are now part of the new normal in California and other nearby states, and the insurance industry is taking notice. Interestingly, insurance companies are much more sanguine about insuring against a big earthquake than they are about insuring against mega-wildfires. It all comes down to risk. Will a super shaker come? Probably, although we don’t know when. Will ferocious wildfires rage? Definitely. And when the inevitable annual conflagration happens the losses to insurers are typically 100 percent over a large geographic area, meaning any insurance company covering property in the burn zone loses big.

As a result, an increasing number of insurance companies are dropping property insurance coverage in areas that are subject to wildfires, and others are hiking rates to such astronomical levels that the average property owner simply can’t afford to pay the premiums. Property owners permanently leave the devastated area, and the local property tax base crashes, plunging municipalities into pools of red ink.

The California wildfire problem has intensified in recent years, and all stakeholders are responding with efforts to decrease the impact. Property owners are slashing underbrush and other vegetation around buildings to rob potential fires of fuel. Utility companies are beefing up powerline maintenance to reduce fire risks, and they’re cutting power in peak fire hazard conditions to mitigate the wildfire danger. New regulations provide an incentive for all stakeholders to pitch in together to address the California wildfire problem.

California wildfires are on the rise, possibly due to climate change, and the best and the brightest minds are hard at work trying to figure out how to reduce the risks. I’m confident that insurers will find ways to keep property insurance costs down while continuing to offer the coverage property owners need. It’s all a matter of balancing risk and reward, much like it was when the insurance industry adjusted to the reality of an increased frequency of hurricanes.


Justice For The Policyholder

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