Disaster isn’t likely to spark big rate rise

It will take months to assess the financial costs of the still raging Wine Country fires. Once insurance companies pay homeowners and businesses for their catastrophic losses, will everyone in California end up paying more for insurance?

By law, insurance companies can’t increase rates of their own volition. They must request higher rates from the California Department of Insurance, and must present several years’ worth of data to justify any increases. They’re also prohibited from raising rates or canceling insurance for people whose homes were damaged or destroyed.

“They’re not going to come to the department (for a rate increase) right after a fire or other event,” said Nancy Kincaid, a spokeswoman for the department. Moreover, for catastrophic events, the department requires insurers to show models spreading losses over an extended period of time “to protect homeowners from wild swings in rates,” she said.

Insurance Commissioner Dave Jones said his agency has put the kibosh on $2.6 million in requested rate increases since he took office in 2011. “We don’t just look at one year, because that might be an anomaly,” he said. The costs of the wildfire destruction will be distributed across multiple companies, he said, “so it’s not necessarily a large number for any one of them.”

The industry itself maintains that premiums won’t rise.

“I don’t think rates will be affected,” said Nicole Ganley, a spokeswoman for the Property Casualty Insurers Association of America. “Insurers plan for wildfires in California. The industry is well-capitalized and financially prepared for this disaster.”

Insurance companies nationwide have over $700 billion in surplus — the equivalent of a savings account — plus backup reinsurance policies, she said.

An accumulation of catastrophes eventually can result in higher rates, but that would probably take several years to trickle to consumers. Meanwhile, insurers can, and do, raise rates in at-risk areas where they can justify that losses are anticipated to be higher.

After years of sustained drought, and more than 110 million trees killed by bark beetles, “there’s no question we’ve seen rates go up in some areas of California because of increased risk,” Kincaid said.

In fact, Kincaid, who lives in the foothills of El Dorado County surrounded by grasslands, saw her annual homeowners’ premium nearly quadruple from $670 four years ago to $2,400 because she’s in a fire-hazard area. “My friends in the flatlands haven’t experienced that, but people in the foothills are paying a lot more for insurance,” she said.

Insurers can also take a “creative” approach to fires, for instance writing policies with “split deductibles” where fires caused by electrical outages or a pot on the stove have a standard deductible, perhaps $1,000; those caused by wildfires have a higher one, Kincaid said.

While the state gets to oversee rates, it cannot force companies to offer insurance. In fact, insurers pulling out after the wildfires could be a bigger issue than rates rising, Jones said.

“Insurers are using increasingly ever-more sophisticated modeling to assess their risks, and with climate change and droughts and more frequent fires of greater severity and greater unpredictability, some insurers are determining that they will restrict where they will write policies,” he said.

California has a fire insurer of last resort, the Fair Plan, which both backstops insurance for homeowners and acts as a canary in a coal mine. If requests to it spike, regulators will realize that insurers are declining to write as many policies, he said.

Despite the devastation in several California counties, with some 3,000 homes and businesses in ashes, the wildfires’ toll is likely to be much less than those of this year’s hurricanes.

Claims from the year’s three major hurricanes are expected to top $60 billion, said Ganley, the insurance association spokeswoman. By comparison, the Oakland Hills fire of 1991, the state’s costliest fire to date, cost $1.7 billion at the time or $2.67 billion in 2015 dollars.

“Wildfires pale in comparison to hurricanes,” she said. “There are 100,000 insurance claims in Houston alone from Hurricane Harvey.”