The Pacific Palisades district in the southwest of Los Angeles has been burning since January 7. By January 16, an area of around 96 square kilometers had burned. The forest fires in and around Los Angeles will be the most expensive in California’s history, with insured losses of 20 to 35 billion US dollars (Gallagher Re) and economic losses of up to 150 billion or more. The major US insurers such as State Farm, Farmers, Chubb, Allstate and Travelers, which are also behind the Californian “Fair Plan” insurance pool, will be the main payers. The Governor of California, Gavin Newsom, declared a state of emergency in Los Angeles and neighboring counties days ago.
thebrokernews talks to Gabor Jaimes, an expert in natural hazard, property and cyber insurance at the Swiss Insurance Association SIA. He lived in Santa Monica, California, from 2005 to 2010 and worked in the reinsurance industry, specifically in the assessment of natural hazard risks in the USA. He assesses the situation there and the insurance situation.
If you look at the pictures on television of how quickly the houses in the affected areas burn down completely, you wonder whether this would not have ended more lightly with better construction methods. Are the Americans building too badly?
Gabor Jaimes: Many single-family homes and apartment buildings in California are made of wood. This is susceptible to fire, but more resistant to earthquakes. In other parts of the world, brick and concrete have been used more and more (e.g. Italy, Turkey, New Zealand), which has proved to be devastating in earthquakes. A construction method like that in Japan would be ideal. The high-rise buildings in downtown L.A. come closest to this.
Could insurers now demand a better construction method (stone, steel, concrete)?
A fire-resistant coating on wood and avoiding the ingress of swirling, glowing ash into the attic can have a very positive effect. Furthermore, withered trees and bushes must be regularly removed from the vicinity of settlements. And finally, a rapidly deployable and well-equipped fire department is needed to quickly bring any fires that break out under control.
These measures have been propagated by insurers for many years and sometimes implemented well, sometimes less well by homeowners or local authorities. A comprehensive, completely new type of construction that can withstand fire and earthquakes, such as in Japan, would take a very long time. However, a rethink could now indeed take place. But you also have to bear in mind that World Cup matches are planned for L.A. in the summer of 2026 and the Summer Olympics will be held in Los Angeles in 2028. Like all hosts of such major events, the Angelinos will want to present as positive and tidy an image as possible.
We read that many Californian homeowners are not insured. The gap in cover therefore seems huge. Can you confirm this?
Reading the headlines and realizing the discrepancy between economic and insured damage, it is easy to come to the conclusion that over 80 percent of building owners are not insured. But this is not the case at all. The fires of the past week, even if they are often referred to as “wildfires” in US newspapers, are currently taking place in peripheral, urban areas (L.A. County).
Transferred to Switzerland, this would be similar to the districts of Höngg and Zürichberg, for example. In L.A. County, insurance penetration is estimated at a good 90 percent. There is no compulsory insurance in the USA, but the banks that provide a mortgage for a house require insurance cover. This is also enforced. The sums insured are also usually adjusted automatically according to the inflation index. However, it can still happen that buildings are underinsured, especially if the insurer is the state-run “California FAIR Plan”, which uses a lower upper limit of cover for more expensive properties. Houses without a mortgage are not under the control of a bank. This can lead to savings being made on insurance.
In my view, the discrepancy between the currently estimated insured losses and the economic losses is incredibly large. We will know the insured losses fairly accurately in 2-3 years. Economic losses often remain a bit of a mystery. My guess is that the very high economic losses include a lot of immaterial damage to the company’s image or non-damage business interruption. I have not yet seen an exact calculation of the damage of up to USD 150 billion.
In addition to buildings, the insured losses also cover vehicles, household contents and, in the case of businesses, business interruption, provided such insurance has been taken out.
What is the “Fair Plan” insurance pool?
FAIR stands for Fair Access to Insurance Requirements. This insurance pool, which as far as I know exists in every US state, was actually designed as a catch-all for buildings that are difficult or impossible to insure. Such FAIR plans were originally created because of violent gangs in certain neighborhoods where insurers no longer dared to insure the buildings.
In recent decades, more and more buildings that were heavily exposed to natural hazards have been included. In addition to these FAIR Plans, there are also the so-called “wind pools” and the “National Flood Insurance Program” (NFIP) in the East Coast states and along the Gulf of Mexico. The principle is always the same. For homeowners who cannot find cover for their property on the open insurance market, these are insurers of last resort. As a result, many so-called bad, highly exposed risks accumulate in these vehicles. However, they are not simply absorbed by the market, but are returned to the private insurers in accordance with their market share in the respective country if the claims burden is high
In recent years and the Woolsey Fire (2018) in Southern California and the Camp Fire (2018) in Northern California, Swiss Re and Munich Re have drastically increased their deductibles. How much do you think reinsurers will have to pay?
I simply cannot estimate that. The fires in the L.A. area in the first half of January will probably be treated as an accumulation event in reinsurance terms. Depending on the loss amount of the individual insurers and their reinsurance structure, it is quite possible that reinsurance cover will take effect. As a rule, the losses passed on to private insurers from the California FAIR Plan are also included in the reinsurance cover.
The rating agency Moody’s wrote that many property insurers in California did not renew many policies after the wildfires in 2017 and 2018, but asked owners to better protect their homes from wildfires. What do you think about this?
The insurers primarily targeted settlements outside the urban centers in this campaign. Nevertheless, these measures also affected homeowners in the districts of Pacific Palisades and Altadina, which were most exposed to the fire. This measure is also due to the fact that the state regulator (State Commissioner) can reject premium increases from insurance companies. If this means that the insurance portfolio can no longer be managed profitably, private insurers only have the option of divesting themselves of these properties or no longer renewing the policy.
Although there have been more than six fires in and around Pacific Palisades since 1980, the premiums were estimated to be among the lowest in the USA. How is that possible?
When I lived in Santa Monica, there were always outbreaks of fire near the urban area. The fire department was always able to bring them under control within a few hours or at the latest after about 24 hours. It almost seems as if an event of this magnitude was never expected. Furthermore, an insurer is not free to determine the level of premiums. The state regulator has to approve premium increases. This may be attractive for consumers to a certain extent. On the other hand, proven market-based mechanisms, such as risk-adequate pricing, are then missing. On the one hand, this removes the incentive to invest in effective protective measures and, on the other, to adjust the cover concept and premiums accordingly in the event of increased risks.
Gabor Jaimes is an expert in the areas of natural hazards, property and cyber insurance at the Swiss Insurance Association SIA. He has over 20 years of international experience in the insurance industry, having spent the majority of his career abroad (USA, Asia, Australia, Europe). Gabor Jaimes is also a member of the board of the earthquake claims organization.
Read also: Cover for fire damage: New model in the U.S.
Search:
Sponsors:
