What if everyone in California stopped paying for fire insurance for a year and instead spent the same amount on fire protection? For many Californians, this hypothetical issue has become a reality as fire insurance prices have skyrocketed.
The expense of clearing trees, brush, and other fire dangers would undoubtedly be in the billions of dollars, but consider the cost in lives and property. In California, it has reached an unacceptably high level.
In truth, we may need to shift our focus to fire prevention rather than fire insurance by default. Californians will have to wait a long time for statewide rate reduction, and property owners are no longer in a market where insurance can properly cover their assets.
California is rapidly approaching the crucial point of being the most dangerous fire state for insurers. Since 1991, the wildfire seasons of 2017 and 2018 have resulted in an overall underwriting loss of over $10 billion for the homeowners line of business, forcing insurers to exit the market.
With the number of alternatives for purchasing fire insurance dwindling by the month, some rural communities now rely only on the state-mandated FAIR (Fair Access to Insurance Requirements) program. The FAIR plan has experienced significant losses, and some policyholders’ prices are skyrocketing.
Some insurers are investigating alternative methods to further analyze and assess their risk, perhaps allowing coverage for previously uninsurable buildings. Farmers Insurance, for example, recently announced that it will use artificial intelligence and high-resolution aerial imagery to write 30,000 new policies in California. The qualifying policyholders will be chosen by zesty.ai, an AI firm that will analyze numerous data points to locate diamonds in the rough in terms of risk.
Taking a nationwide premium holiday to invest in fire prevention faces many challenges, the most significant of which is the banks. Most commercial and residential real estate in California is in debt, and banks demand insurance to safeguard their investment. For banks to assume the entire state’s fire risk for a year just so we could clean things up would be unthinkable and impractical.
Businesses and residents will have to pay a lot of money to secure their own possessions.
What exactly does fire protection entail? Landscaping, innovative firebreaks, open evacuation zones, water tanks, road design, improved construction materials, and the relocation of homeless encampments are all required. Reduced fire danger has not been a priority for some, but it is affecting everyone in California who needs to safeguard real estate.
PG&E received the word a few years ago and has been spending a lot of money on tree pruning, inspections, and underground lines since then. Despite growing risk reduction investments across the state over the previous five years, PG&E’s Chief Risk Officer, Sumeet Singh, has cautioned consumers that there would be more outages this summer than last year. The secondary cost of blackouts is enormous, and it will only become worse as California improves its energy infrastructure.
We at Lockton understand that each risk must be assessed on its own merits. Artificial intelligence is the only method to put a strategy together for businesses with vast portfolios of properties because each site has its own unique risk profile.
At Lockton, data analytics is used to help owners of big property portfolios decide where to invest to get the most out of their money. This refers to the location as well as the sort of investment. A firebreak can make a difference in one situation, while a sprinkler system installation may be more appropriate in another. Anyone owning more than a few properties should use data to guide their decisions.
Some of our clients are being advised to raise deductibles as high as their balance sheets will allow and spend the remaining funds on improving their risk profile. Other companies are being advised to make significant investments that may take years to pay off.
California is far ahead in several areas. California uses significantly more drones to combat fires, has subterranean electricity lines, and uses cutting-edge building materials than other states. California is the only state in the United States with statewide fire regulations (which will be updated again in July).
California is improving, but we cannot become overly reliant on insurance. In the long term, property owners who accept responsibility for their own risks will be better off.
The more agile insurance firms will eventually reward people who take care of themselves.