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How Will California’s Wildfires Impact Property Insurance?

How Will California’s Wildfires Impact Property Insurance?
Homes destroyed after the wildfires in Santa Rosa

Wildfires have ravaged California in the past five years, racking up as much as $24B in damages in 2017 and 2018 alone. In the past, catastrophic weather events — like Hurricane Andrew, which brought $15B worth of destruction to Florida in 1992 — have changed the way insurers handled property insurance. Now, the insurance industry is beginning to confront whether wildfires of this scale in California are the new normal, and to plan accordingly

To get to the bottom of whether California's increasingly destructive wildfires will affect rates and deductibles for CRE, Bisnow sat down with commercial property insurance risk management experts Rob Kaelin and Sean Dolan of CBIZ, a national business services and consulting firm.

Bisnow: 2018’s wildfires showed unpredictable behavior and speed, and no one could have been prepared for the aftermath. How do insurers calculate for this type of risk, and do you think the unexpected scale of these events will change the way wildfire risk is calculated moving forward? 

Kaelin: Year to year, we determine wildfire risk with catastrophe models and hazard-scoring tools for risk assessment, created by third-party providers. These models look at a combination of factors: distance to the nearest fire station or fire hydrant; proximity to flammable materials and high-risk vegetation; area density; exposure; topography; and weather events such as rainfall or drought.

The behavior and the extent of destruction here in 2018 was, yes, improbable and unexpected. But according to the way we measure risk today, wildfires are still generally much more predictable than, say, a hurricane, more controllable, and more preventable. These models are constantly improving, but they won’t change dramatically anytime soon. 

Bisnow: Have you seen any effects from these events on commercial rates or deductibles in Northern California?

Kaelin: We’re seeing some general rate increases, but there’s not as much dramatic activity as you might think given the fires. It’s good to remember that compared to the rest of the country, rates are typically lower in the state of California than elsewhere.

In part, that competitive pricing is the result of a high capacity for the market here to meet demand. And in part it’s because, despite earthquake and wildfire risk, California is not subject to the weather exposure other states contend with. Buildings here don’t get the type of wind exposure nor hail exposure that other states do.

And while earthquake risk is definitely present, coverage is often broken out onto separate policies, and at this point, earthquake coverage is well-understood by insurers, policyholders and lawmakers. 

So considering this market stability, we don’t expect to see a negative impact statewide for all property owners. 

Dolan: Ironically, based on the metrics from our risk models, we’ve even seen some commercial property rates dip down after the wildfires.

After the fires this past year, the risk level for properties in that area is actually lower, because flammable and combustible material has been burnt away. It’s the same effect as you’d have with a controlled burn. So, according to risk metrics, in some areas of California, properties are at less risk for wildfire damage than they were before July 2018.

Bisnow: If not on deductibles or rates, should we be looking out for any impacts on availability?

Kaelin: Well, what may change is insurers’ underwriting guidelines — their decisions upfront about the type and location of a property that they are willing to insure, the risk mitigation practices they may require, and potential coverage terms and limitations that would limit their exposure to loss. Often we can help our clients figure out ways to reduce their risk up front, so their property is safer and more appealing to underwriters. 

But, we don't foresee unexpected or unreasonable changes here either. If anything, we expect market growth.

Bisnow: How can property owners make sure they are adequately protected from disasters?

Kaelin: If you’re affected by a severe weather event or natural disaster like a wildfire, the resulting claims can be complex, and it could take nine months or a year to reach a settlement. Policyholders can insulate themselves by understanding the timeline and expectations during that process.

But from the very outset, it's important people know what questions to ask of their broker, to make sure they have all their coverage needs met. 

This feature was produced in collaboration between Bisnow Branded Content and CBIZ Inc. Bisnow news staff was not involved in the production of this content.