L.A. fire losses will set records, but that's only the beginning
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Risk experts believe the insured losses from the Los Angeles wildfires will easily top $20 billion, but in some ways that's only the start of the crisis California now faces.
Why it matters: Anything above $12.5 billion would pass 2018's Camp Fire to become the largest insured wildfire loss ever, per data from insurance broker Aon. Economic losses will be substantially higher, perhaps tens of billions of dollars more.
- Stunning stat: At the high end of the range, the L.A. fires would be near the list of the 10 costliest natural disasters in global history by inflation-adjusted insured loss, per data from the Insurance Information Institute.
The big picture: The loss number in and of itself is staggering, but only tells a small portion of the story.
- Thousands upon thousands of homes and businesses have been lost, and tough decisions about if and how to rebuild will take years, even as climate change makes this sort of disaster more likely.
- California's insurance market was already struggling as carriers fled the state's many risks. As a result the state insurer of last resort, FAIR Plan, has ballooned to an unsustainable size.
- Systematic reforms designed to expand coverage and let insurers reprice risk are just now coming online, but may be too little too late, given the scope of losses at play.
What they're saying: "A $20 billion to $30 billion, insured loss event is now on the table," says Jon Schneyer, research director at analytics firm CoreLogic.
- Risk assessment firm Verisk said the insured property at risk in the Palisades area alone is at least $15 billion. That's not a loss estimate, but gives a clear sense of what's at stake.
Zoom in: "It's going to be a challenge to the affordability and availability of insurance," says Sridhar Manyem, senior director of industry research at insurance ratings agency A.M. Best.
- Ironically, homeowners' insurance premiums in major California cities are much lower than the rest of the country on a cost-per-$1,000-of-coverage basis, per a report from ICE Mortgage Monitor.
- But if the houses are more expensive, the premium ends up being higher anyway. In the Pacific Palisades, the median house is worth $3.5 million.
- "That is a demographically well-off area. When their only alternative is to get the FAIR Plan, you have to wonder what happens to people who don't have the same resources," says Michelle Meyers, an insurance litigator with Singleton Schreiber in Sacramento.
What's next: The immediate question will be what happens to FAIR Plan, which is not built to handle billions of dollars of simultaneous losses.
- It's a last resort, but an increasingly important last resort after so many insurers left the state. The state's reforms were designed to keep more from leaving, but the risk may overwhelm those reforms.
- "I don't have a lot of faith that a good amount of what's in the sustainable insurance plan really incentivizes carriers to really want to write in the state," says Lindsey Frase, a managing director at reinsurance brokers Howden Re. "I suspect there may need to be an intervening step where there is some support from the state government to weather this storm."
What to watch: Experts say the L.A. fires will also reopen conversations about mitigation, because while insurance may be a first line of recovery, steps like clearing brush and hardening roofs are still the first line of defense.
- "If you can prevent that first home from picking up an ember and catching fire, it's like a natural fire break," CoreLogic's Schneyer says.
The bottom line: The fires are still burning, but the end of their impact isn't days away. It's years or more down the road.
