As the out of control LA fires continue to consume everything in its path, onlookers who are not directly affected by the fire are contemplating the increase in insurance costs that will undoubtedly transpire within America. The US has been hit hard by inflation (the bird flu is currently affecting the supply for eggs which has led to another price hike) which made me wonder if global insurance costs will also be affected. Any predictions?
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It does not answer your question, but I found this (non-expert) take interesting. It applies to California as it does apply generally, and argues that at the end all insurance will have to be backstopped by government. Which means everybody will pay one way or the other.
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Insurance costs will become so expensive everywhere within reach of the Santa Ama winds that people will leave, This will result in Texas becoming a Democrat stronghold.
Yes. As in 2024, 2022, 2020, 2018, 2016.
Would expect the insurers would just no longer offer fire insurance in California.
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Insurers are happy when such an event happens as they can substantially increase rates, they will all have excess of loss reinsurance.
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No they cannot. See regulations in CA.
Ahhh, there’s a thread about numbers!
So, this interview from NPR:
MARTIN: So to start off, will insurance companies have enough money to pay claims for these losses?
VENTON: Yes. Both the industry and outside experts say, yes, people’s claims will be paid for in these fires. Insurance companies often carry insurance themselves through something called reinsurance so that they can cover these kinds of disasters. However, there is some concern that the California FAIR plan is so overextended, so overexposed that it might not have enough in the bank to cover losses. The FAIR plan is the state’s insurer of last resort. Most states have some version of this, and it’s seen an enormous uptake in this area. That’s especially after State Farm dropped 70% of its policies in Pacific Palisades neighborhood last year. The FAIR plan really took up that slack. And the Palisades is one of its most exposed areas in the state. They cover homes there worth collectively about $6 billion.
MARTIN: How much can this FAIR plan afford to lose?
VENTON: Not a ton. Last year, the plan’s president said they had about 200 million in the bank and about 2.5 billion in reinsurance. So they can cover on their own just about 2.7 billion.
MARTIN: What happens if the damage from these fires goes over that, as seems possible?
VENTON: Well, other insurance companies will pick up the bill and will pass some of those costs on to customers, effectively sharing the cost with the rest of us. Something like that hasn’t happened since the '90s, so it’s really not clear what that would look like in California, but the additional costs could be spread out over a number of years, making it easier to absorb. But we really won’t know what those costs are - if there are any - until after the damage is all assessed.
So, beyond the private insurance, there’s an insurance schema organized by the state of California, but run among private insurance companies. It’s called the FAIR plan.
- Last August, they had like 200 million in savings and 2.5 billion USD in reinsurance contracts.
- Quite probably, FAIR plan has not enough resources to cover the loses.
- This would trigger a clause in the LAW that allows insurance companies to recover the loses by increasing primes to everyone in California.
- The loses can be recovered over several years, so no major price increases (yet).
- Depending on how hurt are re-insurers this time, this would set reinsurance prices for the future.
But…let’s assume FAIR plan has not enough money to pay and they set a plan to recover the money over 10 years. So, not much will happen over the next months, there’s an emergency plan.
However, the universe conspires against people and within 5 years another big event happens. The next fire event may or may not happen while the emergency plan is being executed. And it may or may not stress or break the fire insurance schema. So, no one knows (yet).
They already stopped. Many declined to renew. Others stopped offering coverage. Others came up with excuses. Others gave massive premiums (to the extent they were able to - I’m not sure where limits applied, but I remember reading limits were put in to cap insurance premia which led to the insurers leaving the markets).
I’d expect quite a large portion of the homes to be uninsured because of this. Of course, instead of everybody being made to pay for this massive screw-up, the taxpayer will pay instead.
Which means that:
- No incentive to take measures to protect property
- No incentive to build more fire-resistant houses
- No incentive to avoid building in risky areas
- No incentive to do work to remove trees/brush that can cause fires to spread
- No incentive to undertake work on houses to reduce fire risk
Welcome to capitalism - where profits are private, but losses belong to the taxpayer.
Particularly egregious when many of these houses will be worth more than the most people in Switzerland will even earn in a lifetime.
The one I shared which was still standing was apparently worth $9m. But the guy wasn’t too bothered as he didn’t spend much time there as it was just a 2nd home that he had built for his kids when they were studying.
Well, I’m happy for these millionaires that the government decided to cap insurance rates to such a low amount that one insurer gave up 70% of its business there and poor people will instead subsidise the rich through their insurance premiums.
The real estate vultures are already circling…vast swaths of land will be bought by developers, and those devastated areas will once again be populated. I spent some time around the Bird Streets in the 70s…absolute paradise.
There were millionaires in the burned towns. But, some of these burned places were being gentrified, meaning a significant part of the population was low income owners. At the same time, people that already finished paying their mortgages or inherited the property had no insurance.
Back to the numbers and lawsuits…the US is simply fascinating. In past wildfire events, insurance companies have tried to identify the cause of the fire and when the cause of the fire is attributed to action or inaction from an electricity company, they get money from them via lawsuit. Current record is 13.5 billion USD paid by PG&E in 2019 in California.
Currently, insurance companies have ran to courts to get an “evidence preservation” order and forward it to the local electricity company Southern California Edison. The cause of the fires is unknown at the time, but insurance companies are praying for electricity company to the liable.
And there is a 2nd financial insurance schema in place. Since the California electricity companies have been liable for wildfires in the past, they have pooled their resources and created a “Wildfire fund”. It’s a basically a savings pot to have resources to pay when damages are claimed by third parties. The plan for this fund is to hold 21 billion USD. Apparently the savings as of Dec 2024, it had only 15 million USD in savings 
It’s a developing story, more details here…. Anyway, take a seat while waiting, determining the cause of a fire and ensuing lawsuits and settlements take 1-3 years.
PS. about the millionaires. I made a quick check in google maps. Yes, there are huge houses, but you’ll also find plenty of this in the burned areas:
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Via Bloomberg, lawsuits to the local electricity company start to arrive:
Edison International Inc.’s southern California utility faces lawsuits blaming the energy provider’s equipment for igniting one of the wildfires still raging in the second-largest US metropolis.
The first of several suits filed Monday was brought on behalf of a group of homeowners, renters, business owners and others with properties destroyed by the deadly Eaton Fire in the Pasadena area. The complaints allege that Southern California Edison power lines were the cause of the blaze that leveled the community of Altadena. The initial suits are expected to be followed by thousands more legal claims.
This leaves me wondering, what is the real price of electricity per MWh? If what people pays is not enough to cover the liability of the electricity company, prices have to go up, and that would be the real price of electricity.
The state has a history of catastrophic wildfires tied to electric-utility equipment operating during wind storms. PG&E Corp. — the state’s largest utility — was forced to file for Chapter 11 bankruptcy protection in 2019 to deal with a tidal wave of suits tied to multiple fatal northern California fires blamed on its wires.
Under California law, a utility can be held liable for property damage when its equipment ignites a fire even if it didn’t act negligently. If Edison is found liable for the Eaton Fire, it could dip into the state’s $21 billion utility wildfire insurance fund, set up as part of a series of reforms designed to provide financial protections to the state’s large investor-owned power companies after PG&E’s bankruptcy.
Edison’s equipment was blamed for starting the 2017 Thomas and 2018 Woolsey wildfires in the LA area with estimated losses pegged at $9.9 billion.
Now, what’s the way out of this mess? Maybe the most political solution is to split the costs among the largest possible customer population. Not everyone pays for insurance, but everyone is a customer from the electricity company. If the electricity company happens to be found liable for causing the fire, everyone pays via the electricity bill. This would be less dramatic than increasing insurance prices to account for hazards.
So, this is a real-life thriller named “who pays?” Customers of insurance companies or customers of electricity company?
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… and another critical warning by the National Weather Service.
70mph means the choppers can’t fly.
Accuweather estimates $250 billion damage so far, and no end in sight.
Critical to Extremely Critical Fire Weather Continues for Coastal Southern California; Arctic Blast to Chill the East
Critical to extremely critical fire weather conditions will continue for southern California through Wednesday due to moderate to locally strong Santa Ana winds. Red Flag Warnings are in effect.
Coastal southern California will continue to see extremely critical fire
weather conditions through at least today with localized wind gusts near
70 mph focused across Ventura and Los Angeles counties. Very dangerous
conditions will continue into Wednesday for many of these same locations
with a broader, though not as extreme, threat extending along most of the
Transverse and Peninsular Ranges. Winds are expected to oscillate in
magnitude over the next 48 hours but the environment is expected to be
remain extremely dangerous, favorable to very rapid fire growth if a fire
does start.
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Insurance pays. No insurance? Tough. Next time get some. Maybe then people will learn.
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That applies if you think only about insurance customers, the people.
However, the damage level has already put insurance companies under stress. So, they are looking at alternatives such as: i) increase insurance prices, ii) lawsuit against electricity company for damages, iii) reinsurance. Reinsurance is nice, but looking at parametric triggers should make them sweat. So, insurance may offload the problem to electricity company which may or may not have the ability to face the liability.
Then, who pays? just checked and the total market value of Edison International is 21 billion USD. Some people would feel nice if the electricity company is found liable but not possible to get blood out of a stone. Bankruptcy and then what?