Turbulence ahead with emerging risks in P&C insurance

The year 2018 was tumultuous for the property insurance industry in California. The year started with devastating mudslides in Los Angeles and Santa Barbara Counties as torrential rainfall followed close on the heels of the Thomas Fire of late 2017.

In an unexpected move, the Insurance Commissioner determined that the losses from the mudslides would be covered on the property policies as fire losses (in his estimation the wildfire was the proximate cause of the mudslide). This sort of policy broadening is not unheard of following catastrophic losses.

Exclusions & limitations may not be iron-clad

As this period of heightened Atlantic and Pacific hurricane activity and ever-worsening wildfires in the Western United States continues, episodes of judicial and executive policy broadening are likely to increase in number and frequency. Insurers should keep in mind that their exclusions and limitations may not be as iron-clad as they once believed.

Agents/brokers and insureds should guard against complacency, neglecting a particular catastrophic loss exposure with the expectation that either the regulatory or judicial arm of the government will provide them with coverage that their policy excludes on its face is a dangerous game to play — not every catastrophe results in this sort of ex post facto revision to coverage.

Ever-changing regulatory & legislative landscape

In addition to policy broadening, the ever-changing regulatory and legislative landscape creates a set of emerging risks all its own. In California a number of laws have been passed since 2017 that change the way homeowners’ insurers must operate in significant ways, such as:

• New requirements for insurers to conduct new reconstruction cost estimates every other year.
• Pay the full replacement cost and any applicable building ordinance.
• Actively inform all insureds of potential discounts available for taking proactive steps to mitigate fire hazard — such as clearing defensible space or installing fire-resistant building elements, as well as others.

Changes such as these to the regulatory landscape will not end with the 2018 fire season, new regulations and legislation will continue to evolve. Insurers and agents alike should work to stay abreast of these mutable rules.

Cautionary tales

Every widespread disaster brings with it a host of cautionary tales for those who take the time to consider and learn from the experiences of others. Following the wildfires in California in each of the last two years we have seen significant demand surge — that is, increases in the cost of materials and labor (not to mention shortages of both causing longer-then-expected delays in repair and rebuilding).

It’s not at all unusual for the actual cost to repair or replace a structure to increase 20%, in some cases as much as 50% or more following a disaster. Homeowners and business owners who have not taken this phenomenon into account can find themselves behind the proverbial eight-ball as their policy limits fail to measure up to the suddenly higher-than-expected costs of rebuilding. Even a policy that includes a provision to allow the Coverage A (dwelling) limit to increase 20% or 25% may not be sufficient in a particularly bad demand surge scenario.

There are reports from Sonoma and Napa counties that as we approach the two year anniversary of the Atlas and Tubbs fires (among others from the 2017 season), as few as 40% of homeowners have filed for building permits to reconstruct their homes. This kind of large-scale exodus will cause lingering aftershocks to the communities — lower tax base, fewer consumers making purchases in the area, etc.

It can also put even greater pressure on an already very tight rental market — if homeowners choose not to rebuild, or are unable to rebuild due to underinsurance, they will displace renters with lower incomes or less pristine credit, increasing already sky-high rental prices in the affected regions.

Threats ahead

As both Pacific and Atlantic storm activity continues in a very active multi-year cycle, we will all watch keenly to get a sense of how this will impact the insurance industry. Threats of rising sea levels makes storm-surge and severe high tide events more likely to damage or destroy coastal property, ocean marine carriers have to take frequency and severity of tropical and extra-tropical cyclone activity into account as they underwrite and price coverage for ocean-going container vessels and tankers, and periods of extreme drought and extreme rainfall will impact various parts of the country — causing damage to crops, severe wildfire risk, flooding and mudslides, and other forms of economic interruption.

Many of these loss exposures are insurable, whether by private industry or by the federal government (crop insurance, NFIP, etc).

Keep your seatbelts securely fastened and your seatbacks and tray tables in their full upright and locked position as we launch into another new year — one thing we know for certain, there will be turbulence.

Related: Internal, external pressures to impact 2019 insurance industry

Michael D. Brown, CPCU, CCRA, is vice president and property department manager at Golden Bear Insurance Company. He can be reached at michaelbrown93442@gmail.com. Opinions expressed are the author’s own.