California Insurance Commissioner Ricardo Lara is alerting citizens to review their insurance policies in order to protect themselves and their assets in anticipation of winter weather bringing the possibility of floods, mudslides, debris flows, and other disasters to recent wildfire burn areas throughout the state.
The commissioner issued a notice to insurers reminding them of their duty to cover damage from any future mudslide or similar disaster caused by recent wildfires that weakened hillsides. In particular, the United States Geological Survey (USGS) has projected increased likelihood of debris flow for fire-scarred areas of the state in the event of heavy rainfall.
Many Californians may not be aware that homeowners’ and commercial insurance policies typically exclude flood, mudslide, debris flow, and other similar disasters—unless they are directly or indirectly caused by a recent wildfire or another peril covered by the applicable insurance policy. For insurance purposes, it’s important to understand the difference between “mudslides” and “mudflow.”
Mudslides occur when a mass of earth or rock moves downhill, propelled by gravity. They typically don’t contain enough liquid to seep into your home, and they aren’t eligible for flood insurance coverage. In fact, mudslides are not covered by any policy.
Mudflow is covered by flood insurance, which is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers. Like flood, mudflow is excluded from standard homeowners and business insurance policies—you must buy the coverage separately.
The California Department of Insurance has posted a fact sheet for consumers to answer questions about what their policies cover.
As wildfires continue to burn in California, Oregon, Colorado, and elsewhere – and people pray for precipitation to help firefighters in their efforts – another threat looms: mudslides.
Wet weather is in Oregon’s forecast, and the Marion County Sheriff’s Office warned that mudslides and falling trees will be a big concern with so much burned land in the county. Areas that could be seriously affected include Mill City and Gates, where much of the towns have been destroyed by wildfires.
The sheriff’s office said people need to pay attention to what happens around them and listen to alerts from local authorities.
“We’re really concerned about as those high winds pick up, some of those coming down and creating more hazards along the roadway, more than we would see in a typical windstorm,” Sgt. Jeremy Landers with the Marion County Sheriff’s Office said.
He added that it’s important that people have a plan in place in case the weather becomes dangerous.
Santa Cruz County, Calif., also is preparing for mudslides in the aftermath of the CZU Lighting Complex fire in August. Carolyn Burke, senior civil engineer, said during a special meeting of the Santa Cruz County Board of Supervisors, “The only effective means of protection” is early warning and evacuation.
The fire in the Santa Cruz Mountains burned 86,509 acres – and while Cal Fire on September 22 said it was 100% contained, risk remains of fires igniting and the subsequent danger of mudslides when rain comes. Rainy season there has a history of starting from September to November.
In Colorado, cooler temperatures, rain, and snow have helped suppress the fires that have been raging across that state. Alaska Incident Management Team Incident Commander Norm McDonald wrote, regarding his team’s work on the Grizzly Creek Fire, “While our assignment ends with the Grizzly Creek Fire at 91% containment, we realize there is still much work to be done and the ramifications of this fire will be long-lived with the potential for mudslides and flooding.”
Mudslides occur when a mass of earth or rock moves downhill, propelled by gravity. They typically don’t contain enough liquid to seep into your home, and they aren’t eligible for flood insurance coverage. In fact, mudslides are not covered by any policy.
Mudflow is covered by flood insurance, which is available from FEMA’s National Flood Insurance Program (NFIP) and a growing number of private insurers. Like flood, mudflow is excluded from standard homeowners and business insurance policies—you must buy the coverage separately.
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
The Los Angeles office of the National Weather Service predicted prolonged, potentially record-setting heat and dangerous weather conditions throughout California this summer – and, some experts expect it to continue for some time beyond.
“If you like 2020, you’re going to love 2050,” said Michael Gerrard, director of Columbia University’s Sabin Center for Climate Change Law, in a recent Los Angeles Times article.
These conditions can only exacerbate this year’s atypical wildfire activity in the state. So, it should be no surprise that California is grappling with how to stop insurers from abandoning fire-prone areas, leaving countless homeowners at risk.
“Years of megafires have caused huge losses for insurance companies, a problem so severe that, last year, California temporarily banned insurers from canceling policies on some 800,000 homes in or near risky parts of the state,” The New York Times reports. “However, that ban is about to expire and can’t be renewed, and a recent plan to deal with the problem fell apart in a clash between insurers and consumer advocates.”
Insurers are widely expected to continue their retreat.
“The marketplace has largely collapsed” in high-risk areas, said Graham Knaus, executive director of the California State Association of Counties. “It’s a very large geographic area of the state that is facing this.”
California, where regulations lean toward consumer protection, is particularly challenged. The state doesn’t let insurers set premiums based on what they expect in future damages. They can only set rates based on prior losses. They also aren’t allowed to pass along reinsurance costs to policyholders – costs that are expected to rise as fire risks worsen.
State lawmakers introduced a bill to let insurers writing coverage in wildfire-prone areas incorporate climate predictions and other costs into their rate requests in return for making coverage more available and offering discounts to people who take steps to reduce their home’s vulnerability.
Insurers supported the change, as did the counties association and the union representing firefighters. But the bill faced strong opposition from consumer groups, who ultimately prevailed. Last month, the state senate stripped most of the provisions from the bill and directed the insurance commissioner to review the current rules and report back to the legislature in two years.
The legislature ended its session without acting on the revised version. Insurance Commissioner Ricardo Lara said his focus now is working with high-risk communities to reduce their wildfire risk enough that insurers will keep offering coverage without big rate increases.
“If Californians do our part to protect homes from wildfire,” Lara said, the industry should respond by agreeing to insure those homes.
Janet Ruiz, Triple-I’s director of strategic communications, said, “Insurers in California are working with legislators and the California Department of Insurance to find solutions to keep homeowners insured in wildfire risk areas. The industry supports mitigation efforts, the California FAIR Plan, and the proposed IMAP program.”
With another catastrophic wildfire season again underway in California, join this press conference to hear from fire science and insurance experts on practical steps homeowners and renters can take to reduce their risk from wildfires. Learn where to start and what actions communities need to take first to continue to adapt to wildfire and stay protected.
Register now to join experts from the American Property Casualty Insurance Association, the Triple-I, the Insurance Institute for Business Home and Safety and the National Fire Protection association on September 3, 2020, 10:00 a.m.-11:00 a.m. PT. Register now
Those of us who aren’t directly affected may have become jaded enough to think, “More fires in the West. That’s normal.”
But as Janet Ruiz, Triple-I’s California-based director of strategic communications, explains, “We’ve had a significant number of large wildfires since 2015, but this year is anything but normal.”
Your first clue might be the alphabet soup of names applied to this year’s blazes: LNU, CZU, SCU. You might remember Northern California’s major wildfires in recent years — the Camp Fire, the Carr Fire, Tubbs, Ferguson — and wonder why this year’s don’t have similarly straightforward names.
According to California fire officials, it’s because the number of fires has required them to be grouped together in “complexes”:
The LNU Lightning Complex in the northeast Bay Area, including Sonoma, Napa, Solano, and Lake counties.
The CZU Lightning Complex in the western and southern Bay Area, including San Mateo and Santa Cruz counties.
The SCU Lightning Complex in the eastern and southeastern Bay Area, including Santa Clara, Alameda and Contra Costa counties, and neighboring San Joaquin and Stanislaus counties.
“We only group fires like that when we have a lightning siege as such,” Brice Bennet, a public information officer for the California Department of Forestry and Fire Protection (Cal Fire), told the San Francisco Chronicle.
The last major lightning siege was in 2008.
“Once the fires are grouped into a complex,” the Chronicle explains, “they’re managed so fire managers can assess all the different fires within each one and share resources across the greatest need — life being first, and property second. That’s where the prefixes come in. Those monikers are geographical locators based on Cal Fire administrative unit codes.”
Ruiz explained that many of the fires since 2015 were caused by human activity, rather than nature.
“Authorities have worked hard and invested a lot of money to mitigate those causes,” she said. “Then along comes this unpredictable, unpreventable abundance of lightning strikes.”
Fewer firefighters: Thanks, COVID-19
The daunting number of blazes coincides with a reduced availability of firefighters, courtesy of the coronavirus pandemic.
“In past seasons, a lot of help came from inmates recruited to assist in firefighting,” Ruiz said. “Many of these have been released because of COVID-19 and therefore aren’t available.”
Less warning, preparation paramount
Lightning is a universal metaphor for random ill fortune, and the chaotic causation of California’s 2020 fires has affected how authorities communicate with residents about impending threats.
“Normally you’d get warnings about approaching fires, followed, if necessary, by a mandatory evacuation order,” Ruiz said. But last week, when Ruiz was evacuated, “We didn’t get an advisory – we were just told to go.”
Wisely, she and her husband keep “to go” bags near their front door and were able to leave within 10 minutes of receiving the order.
With business owners facing the ‘new normal’ of a seven-month wildfire season, compounded by rising temperatures, public safety power shutoffs, COVID-19 and civil unrest – wildfire preparation will be more critical than ever this year.
As outlined in a new Allianz report “Future Fires: Weathering the Fire Storm”, 2019 was a catastrophic year with 46,786 wildfires burning more than 4.6 million acres, leading to the evacuation of over 200,000 people, sustained blackouts, and the declaration of a state of emergency in California. And this year wildfires are already blazing across drought-ridden Western states while the risk of coronavirus has reduced the number of firefighters available in California and is likely to remain well into the fall.
According to Allianz and the Triple-I, business owners should take the following steps to safeguard employees and property from wildfire:
1. Create defensible space around your building or structures
2. Create a Vegetation Maintenance Plan (VMP) to reduce sources of ignition
3. Use noncombustible materials for building signage, avoiding wood, plastic, and vinyl
4. Select exterior wall cladding made of noncombustible siding materials such as concrete and brick
5. Select dual-paned windows with tempered glass, kept closed when wildfire threatens
6. Use noncombustible material when replacing roofs. Homes with wood or shingle roofs are at high risk of being destroyed during a wildfire
7. Inspect vents and clear debris from roofs. Roofs and gutters are particularly vulnerable surfaces, as embers can lodge here and start a fire. Regularly clearing your roof and gutters of debris, installing gutter guards or screens, and blocking off any points of entry on your roof will all help safeguard your home
Finally, don’t forget to update your inventory, business continuity, evacuation, and safety plans.
Business owners should further discuss with their insurance professionals the risks their business’s face as it pertains to wildfire and the need for:
Property Insurance (including the differences between replacement vs. cash value)
Business Interruption (also known as business income) and extra expense insurance
Mitigation solutions and fire protection services available
Precautionary measures that can be taken today to prevent loss tomorrow
“Preparedness is as vital to an organization as business resilience planning,” said Janet Ruiz, Director of Strategic Communications for the Insurance Information Institute. “We recommend business owners review their insurance coverage to ensure they can adequately rebuild their properties as well as protect their business against major disruptions such as wildfire.”
“Future Fires” highlights how a number of innovative technologies are stepping up to meet the challenge of the prevalence of wildfires and the prolonged duration of the wildfire season. One application of fire protection that is currently in use is an environmentally safe biodegradable fire-fighting foam used for pretreatment and suppression around property and building perimeters. When fire is imminent, foam is applied from private fire trucks appointed with state-of-the-art equipment.
The report also cites a Silicon Valley artificial intelligence company that has developed a system that analyzes satellite images every 10 minutes to identify where new wildfires may have broken out. This technology is trained to spot the likely signs of wildfires, and then alert firefighting agencies, who can verify if indeed a fire has broken out. The company hopes to have the system in place by next year’s wildfire season.
“Allianz is committed to helping businesses mitigate extreme catastrophes like wildfires with the most advanced techniques and solutions available,” says Scott H. Steinmetz, P.E., Regional Head of MidCorp at Allianz Risk Consulting. “The 2020 fire season presents unique challenges and complexities that will inherently put our skills to their utmost test. I feel confident, however, that businesses can greatly minimize their losses with advance planning and close communication with their insurance carrier before, and in the unfortunate event that it occurs, during and after a wildfire.”
Another wildfire season has begun. Almost 4.5 million U.S. homes are at high or extreme risk of wildfire, with more than 2 million in California alone.
Residents of wildfire prone areas and just about anyone who is seriously concerned about the dangers posed by wildfire could benefit from the National Fire Protection Association‘s webinars on how to prepare to defend against the destructive threat of wildfire.
A recording of the May 6 webinar on financial preparedness can be viewed here.
The presenters were Nicole Mahrt-Ganley, American Property
Casualty Insurance Association, and Janet Ruiz, Insurance Information Institute
(Triple-I). They offered guidance on how to read a homeowner’s insurance
policy, understand policy deductibles, and the factors to consider when
determining how much insurance coverage to purchase.
Ruiz and Mahrt-Ganley discussed how insurers assess a home’s
risk to wildfires through sophisticated technology and on-site inspections as
well as the ways an insurer calculates homeowner’s insurance premiums based on
the home’s loss history, location, age, size, and its construction type and
quality.
They also provided tips on how to develop an inventory of a
household’s personal possessions, steps to take if a homeowner’s insurance
policy is non-renewed, and how to navigate the insurance claims process.
One of the largest
car-insurance companies in the country and a smaller Midwestern auto insurer
are refunding hundreds of millions of dollars to their policyholders, citing a
dramatic drop in accident claims from Americans hunkered down in their homes, The
Wall Street Journal reports.
PathogenRX, a parametric insurance policy
developed by broker Marsh, Munich Re, and technology firm Metabiota, is designed
to provide business interruption insurance in the event of a pandemic, Insurance
Journal reports.
When the coronavirus outbreak forced the
cancellation of Wimbledon it looked like game, set, and match against the All
England Club. It turns out, The Times reports, that the club has
insurance that covers infectious diseases and is putting together a claim
potentially in excess of £100 million.
World insurers told
governments on Monday that making them pay out on losses suffered due to the
coronavirus that were not covered by policies risked destabilizing the
insurance industry, Reuters reports.
Insurance brokers say viruses and pandemics are specific
exclusions in many such policies, which are often included with standard
property and casualty coverage. But whether COVID-19 is the basis for a
business interruption claim remains an open question as government leaders and
the plaintiffs’ bar wrestle over the issue.
COVID-19 could produce a big increase in social inflation,
according to A.M. Best. The reason: expectations that businesses will sue their
insurers in an attempt to access their business interruption coverage for
losses relating to the coronavirus pandemic.
SARS
infected 8,000 people and led to millions of dollars in business-interruption
insurance claims – including a $16 million payout to a single hotel chain. As a
result, The Washington Post reports, many insurers added exclusions to
standard commercial policies for losses caused by viruses or bacteria.
The Federal Emergency Management Agency (FEMA)
announced that it will extend the grace period to renew flood insurance
policies to help policyholders affected by the coronavirus (COVID-19) pandemic.
FEMA said it would push back the grace period from 30 days to 120 days.
First responders are preparing for raging wildfires that they
expect will consume thousands of acres and drive some residents from their
homes in upcoming months. But this year, CNBC reports, preparations have
stalled. The coronavirus pandemic has hit the country’s already strained
emergency services, raising concerns over inadequate disaster relief during
peak fire season.
Florida’s Chief Financial Officer has ordered the Division of Risk
Management to fulfill workers’ compensation claims for frontline employees who
work for the state, the Tampa Bay Times reports. But the order doesn’t
include similar workers in the private sector.
