California in Crisis

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Courtney’s Corner, Resources Magazine

Author: Courtney Kerr

Imagine owning a stunning $6,000,000 home in Santa Barbara, CA, with all the bells and whistles that high net worth insurers look for when selecting a risk. Your home is pristine. You take pride that you’ve never had a loss. For the past several years, your annual homeowner’s insurance premium has been $6,000. Now imagine, you receive your 2019 renewal—and the premium is $26,000! Your agent tells you it could have been much worse. Some homeowners can’t find private insurance anywhere and are being relegated to the California FAIR Plan*—not the best solution, by far.

The homeowner’s insurance market in California is in distress. As if the threats of earthquake events and frequent mudslides weren’t enough, the catastrophic wildfire outbreaks of 2017 and 2018 have made things worse—much worse.
Insurance claims from California’s 2018 wildfires have become the most expensive in state history as they topped approximately $20 billion. In 2017, the state suffered $12 billion in claims. Most insurers are shuddering at what may happen this year.
Homes outside of catastrophe zones can still find ample insurers willing to offer coverage. However, homeowners in brush-exposed areas are finding insurance companies want massive premium increases or are no longer willing to offer terms at any price.
Homeowners located in and near high-risk zones who do receive quotes are subjected to substandard coverage options, lack of replacement cost coverage, and restricted limits. As a last resort, there’s the California FAIR Plan with coverage offerings up to $1.5 million for a dwelling and contents at high-risk properties. The coverage is basic and far from sufficient for high net worth individuals, but it’s better than nothing. The price is comparatively competitive, but you get what you pay for.

The key to insuring brush-exposed areas of California is risk selection. Companies that use geospatial digital data and modeling tools have become crucial to insurers, MGAs, and agents writing homeowner’s insurance in California. This data helps properly identify high hazard properties and eliminates misclassifications of lower risk properties. Underwriters know what they are getting into so they can price appropriately with such tools. Underwriting expertise and the ability to think outside the box are vital to success.

The best way to think about brush and wildfire exposures in California is to compare it to the windstorm issues suffered in Florida 13 to 15 years ago. Many insurers are exiting the market, and those that haven’t have vastly tightened their guidelines. In the 2004 to 2007 Florida homeowner’s crisis, the lack of capacity resulted in Demotech companies offering terms at more competitive premiums than the AM Best rated insurers.** Why? The Demotech rating agency requires less rigorous financial ratios, resulting in greater leverage and the ability to offer lower prices.
Will these types of insurers find their way to California or will creative underwriters fill the gap? We shall soon see, since many are working hard on solutions which may create great opportunities for the insurers and alternative solutions for insureds.
Ultimately, California homeowners will be provided with manageable solutions. It just may take six to nine months. Just as it did in Florida after the 2004–2007 crisis, the insurance market will respond. There is a lot of capacity on the sidelines. Good underwriting agents need to show capacity providers how to make money. In the meantime, stay vigilant.

About the Author:
Courtney Kerr, CPRM, CISR
Courtney is the VP of MarketScout Corporation’s Private Client Solutions. She has over ten years of experience in the high net worth insurance industry as an insurance company underwriter and as a wholesale broker. Courtney is a named underwriter on various Lloyd’s of London cover holder agreements and was in the first group of industry professionals to be conferred the Certified Personal Risk Manager (CPRM) designation. She also holds degrees in International Business and Spanish.