California’s wildfire season has been a long and grueling one this year, scorching both the northern and southern halves of the state.  Although some of the fires are still burning, eventually the state’s winter rains will come and douse the remaining embers.  In the coming months we will see people rebuilding their homes and businesses while the insurance industry figures out how to reorient itself in light of this year’s unprecedented wildfires.

The North

The initial tallies are in for the wine country wildfires that left large swaths of northern California’s pastoral landscape charred and desolate.  Earlier this month, Insurance Commissioner Dave Jones announced that more than $9.4 billion in insured losses relating to those wildfires had been received by his office concerning Butte, Lake, Mendocino, Napa, Nevada, Sonoma, and Yuba counties.  According to Commissioner Jones, the October wildfires “have now proven to be the most destructive and deadliest in our state’s history.”

The loss number is based on claims data from over 260 carriers and the losses included 21,000 homes, 2,800 businesses, 6,100 automobiles, and 788 losses involving other lines of insurance.

Although the cause of the wine country wildfires has still not been determined, utilities giant PG&E is already facing multiple lawsuits in connection with the fires that allege negligence and safety code violations.  These lawsuits are still in the beginning stages, and some were brought before the relevant fires were even extinguished.  Nevertheless, those in the know are already predicting that PG&E will burn through its entire $850 million general liability insurance tower to pay for legal fees and costs on these and any additional cases brought for the October fires.  Berkshire Hathaway has the largest share to the tower with roughly $200 million spread across several layers of excess.

The South

Like a game of whack-a-mole, once the wine country wildfires were extinguished, a fresh batch of wildfires popped up in southern California, including the Skirball, Lilac, Thomas, and Creek fires.  The most notable of these is the Thomas fire, which continues to threaten Ventura and Santa Barbara counties, areas northwest of Los Angeles.  As of the writing of this article, it has become California’s largest wildfire ever recorded and looks on track to continue growing.  It is expected to cause more than $1.5 billion in losses, according to Moody’s Analytics, and has burned more than 1,000 structures.

Although it is likely that far fewer properties will be damaged in the southern California wildfires, the rebuilding costs will still be substantial and could eventually exceed the losses covered in the wine country wildfires.  Not only is a higher percentage of the property insured in Southern California, but the fires are moving through wealthy neighborhoods.  CoreLogic, a real property analytics outfit, released numbers indicating that the average cost to rebuild a home destroyed by the southern California fires will be roughly twice the cost of the homes damaged in northern California.

The cause of the Thomas fire is currently unknown.

Insurance Industry Ramifications

Overall, this has been a rough year for those in the disaster insurance business.  According to figures released this week by Sigma, 2017 has been the third-most expensive year for insured losses, as there has been an estimated $306 billion in losses this year.  2011 was the most expensive year on record, as that was the year of the Japanese earthquake and tsunami disaster.

According to a recent report by Swiss Re, 2017 exceeded the insurance industry’s 10-year annual average of $58 billion per year.  Swiss Re determined that the U.S. had the largest impact on the year, as it had its second most expensive hurricane season with Hurricanes Harvey, Irma and Maria.  2017 was beat out only by 2005, the year of Hurricane Katrina.  This year’s hurricanes were some of the most costly in U.S. history and, combined with this year’s destructive wildfire season, will lead to premium volume increases, the report said.  According to Swiss Re, “This should further support growth in the insurance markets, with global non-life premiums forecast to rise by at least 3% . . . in real terms annually in 2018 and 2019.”

In addition, according to a report this week from A.M. Best Co. Inc., Q4 losses resulting from the wine country and southern California wildfires will fall within insurers’ risk tolerances, but may pose other issues.  The report indicated that some companies had already announced losses in the hundreds of millions, such as Chubb Ltd. ($280 million), Travelers ($675 million), and Allstate Insurance Company ($452 million).  Despite these losses, at this point A.M. Best does not anticipate any ratings action based on the wildfires alone.

A.M. Best’s report, however, suggested that carriers will likely face regulatory and underwriting hurdles, such as needing to re-examine their risk tolerance and, at least in California, to work with regulators to adjust their premium pricing upward.

In California, Proposition 103 requires the insurance commissioner’s “prior approval” before carriers can increase property and casualty rates.  Essentially, Proposition 103 seeks to prevent carriers from taking the losses from one event and using such losses to justify large rate increases.  Instead, rate increases are to be based upon long-term trends for the assessed risk.  Commissioner Jones recently commented that this year’s wildfire season and its massive losses “will be added into that 20-year trend and will have some impact on rates.”

If you have been wondering whether insurance rates will be increasing, the answer is “Yes.”  The question now is, “By how much?”  And for that, we will need to wait and see.