Best’s Special Report: California Wildfires to Create Earnings Pressure, Underwriting Issues for Insurers

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best believes insured losses from the late-2017 wildfires will be within insurers’ risk tolerances and consequently does not anticipate rating actions; however, a new report states that insurers will need to rethink their wildfire exposure approach to meet a number of underwriting, risk management and regulatory challenges.

A new Best’s Special Report, “California Wildfires: More Earnings Pressure and Underwriting Issues for Insurers,” states that by market share, many national carriers dominate the homeowners, farmowners and commercial property lines of business in California. These national carriers have been stressed by many catastrophe events this fall, and those that use independent adjusters are paying more because of the current demand. All insurers will have their claims settlement processes tested by the wildfires. The report notes that total limit losses, while still difficult given the level of destruction, make the claims process easier to settle, but partial losses, including smoke and ash claims, often present a longer settlement process, which can strain the claims infrastructure. Other areas that insurers will need to re-evaluate or prepare for in coming years include as follows:

• Partnerships with regulators: Insurers will need to work closely with regulators, to adjust their pricing/terms and conditions;
• Underwriting strategies: Pricing for perils such as smoke, ash, and brush fire may have to be re-evaluated, as will terms and conditions for replacement cost values and living expenses;
• Capital requirements: Refined parameters and other enhancements on catastrophe models could lead to higher estimates of probable maximum losses (PMLs) and capital requirements;
• Higher reinsurance costs: Loss-affected areas may see an uptick in pricing, which could result in higher reinsurance costs for the primary carriers; and
• Risk appetites and tolerances: Insurers may employ more conservative capital management strategies and reinsurance partnerships in response to the number of severe events in 2017.

Overall, the California wildfires demonstrate the essential role insurers play in the economy during unexpected times like these. A.M. Best believes a year like 2017 validates insurers’ vital role and underscores the need for prudence in capital and risk management.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=269117.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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Source: A.M. Best