Claims lessons & implications from 2020's wildfire season
From state regulators to AI risk evaluation, these are the emerging trends shaped by 2020’s wildfires.
The past year was a challenging one in many ways, and the wildfire devastation in the Western United States was no exception. More than 4.1 million acres burned across the state of California in 2020, nearly one million of which have gone up in flames since mid-September. In northern Colorado, the Cameron Peak fire was the largest in Colorado’s recorded history, consuming over 206,000 acres (320 square miles) in the mountains west and northwest of Fort Collins and Estes Park. And in Arizona, the 2020 wildfire season burned just under 955,000 acres, totaling more than double the 520,000 acres that burned in the 3,627 fires over the previous two years combined.
With record-breaking losses to account for, what will the claims lessons and insurance implications of the 2020 wildfire season be? While that’s a question that we will only fully be able to answer in hindsight, here are three trends to watch.
AI & technology take a major role in evaluating risk
As some insurers pull out of the market, technology is one way that others may be enticed to enter it. New technology and InsurTech advances are driving this evolution, with many new entrants to the market using modeling to predict risk. In addition, tech companies are acting as reinsurers. For instance, various startups use advanced deep learning and AI to evaluate risk and provide reinsurance for carriers that cover catastrophic events such as wildfires. One such startup is Kettle, which is focused on California wildfires.
Both of these shifts are creating an impact on the overall market. Insurers keen on taking wildfire risk off of their books might be enticed to remain in the market if they are able to secure favorable reinsurance from venture-backed firms, and these venture-backed tech companies may fill a void if desaturation of the market continues. Moreover, as technological advances continue to drive additional innovation, insurers may be in a position to accurately assess and price exposures from wildfires, which may help slow the exodus of insurers from this particular market.
Cali. commissioner will continue to play role in risk management
In California, the negative forces between COVID-19 and wildfires have led Ricardo Lara, state insurance commissioner, to continue to step up protections for the state’s insureds. On September 29, 2020, California Governor Gavin Newsom signed into law the Department of Insurance-sponsored Assembly Bill 3012 and Senate Bill 872, which expand consumer protections to cover the total loss from wildfire state of emergency, including coverage of living expenses, time to collect replacement value, contents coverage and relocation after a loss.
On October 2, 2020, Commissioner Lara issued a notice requesting that insurers waive the requirement for policyholders suffering a total loss due to wildfires to complete a personal property inventory to collect all or a significant portion of their personal property (or contents) policy coverage limits. And on November 5, 2020, Commissioner Lara issued a mandatory one-year moratorium on insurers either canceling or not renewing property insurance policies. This affects approximately 2.1 million policyholders who are located within or adjacent to areas affected by the recent wildfire disasters.
Despite the commissioner’s focus on protecting policyholders, he understands that insurers in the property insurance market are somewhat handcuffed due to Proposition 103, which not only considerably cut down insurance rates when it was first approved in 1988, but also subjected insurance companies to public inspection should their annual overall rate increases go over 7%. The state insurance commissioner’s office is therefore pushing for new rules allowing insurers to consider rate increases that are more reflective of their risks — rate increases that could go higher than 7%. In exchange, the commissioner would require insurers to provide more information to homeowners on how they can reduce their wildfire risk. The hope is that this will mitigate the risk and stabilize premiums.
Construction, construction defect claims & costs will grow
The combination and number of wildfires, coupled with the challenges of COVID-19, has created a shortage of builders to do repair work. This has had an impact on claims as policyholders retain builders — who are now charging a premium due to high demand — and then passing on the costs to their insurers under their property insurance policies. As such, this has resulted in disputes regarding the reasonable cost to repair a property after wildfire damage.
After the Woolsey and Camp Fires in 2018, we predicted that rebuilding would be inevitable, which could lead to new construction-defect claims within the next 10 years as a result of California’s Right to Repair Act. That prediction continues to hold true and is bolstered by the wildfires of 2020, which will also have a significant impact on the rebuilding market and the post-wildfire construction-defect claims that will come during the next decade and beyond.
2020′s impact yet to be fully revealed
Wildfire insurance was already a challenging market for carriers — and then along came 2020. Insurers have been hit with a myriad of claims and now, a shortage of contractors will necessitate paying even more to rebuild. Multiply these expenses across multiple homes in comparison to premiums and it’s really no wonder insurers are pulling out as they find themselves losing significant money on every one of these claims.
The difference between 2018, which was also a challenging wildfire season, and 2020 is the added element of the coronavirus. Although we didn’t have 2018-level damage this year, COVID has greatly impacted the losses and rebuilding process.
We will see some lasting impacts of this year immediately (the use of AI, for example, is here to stay), but others may take longer to fully unfold; it will be 2028 before we see if that flood of construction-defect claims materializes. Regardless of the severity of future wildfire seasons, we expect to feel the impact of the 2020 season for years to come.
David Ktshozyan is a senior associate at Clyde & Co in Los Angeles. He can be reached at david.ktshozyan@clydeco.us.
The opinions expressed here are the author’s own.
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