Uninsurable risks?

This article was first published in The Insider Briefing and on The Insurance Insider on 19 November.

The devastating impact of the California wildfires this autumn has made for some horrific reading.

At the last count, buildings destroyed by the Camp and Woolsey fires totalled more than 15,000 with civilian fatalities at 80 and about 1,000 people still missing.

While the human suffering will, of course, remain front of mind for those of us in the (re)insurance sector, the fires also prompt the question of what will happen when affected insurance policies come up for renewal.

This isn’t even the first time wildfire carriers have been hit this year. The Carr and Mendocino wildfires in July this year caused more than $845mn of insured loss, according to the California Insurance Commissioner Dave Jones.

Wildfires aren’t a new phenomenon in California – half of the state’s land is either grassland or forest, both of which have a tendency to burn in arid conditions.

Wildfires aren't even new to Butte County. In fact, according to a blog published by RMS on Friday, property developments in Paradise and Magalia have burned three or four times in the last 20 years, prior to this year’s events.

However, what is new is the expansion of habitations and other buildings towards those areas most prone to fires.

That, added to rising temperatures, dry air from a changing climate and the fact there have been consecutive loss years from wildfires in the region, could prompt some to ask: when does a risk such as this become uninsurable?

As previously highlighted, the spotlight has also fallen on utility companies’ casualty coverage. Pacific Gas and Electric’s most recent filings showed it had been forced to pay $360mn for its $700mn of general liability and $700mn of third-party property damage cover. How much more would it be willing to pay before insurance becomes economically unviable?

It’s tempting to think that, after two horrific years for California wildfires, underwriters might shy away from the risk at renewal.

But I’d argue that this could be the best time for prudent underwriters to tweak, tailor and offer their wares.

As Bill Gates once noted: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.”

Risks change, but not overnight. And just because we’ve had two horrific loss years in a sector doesn’t mean all the years to come will be loss making.

Take the Gulf of Mexico. Back in 2010, Munich Re Underwriting active underwriter Dominick Hoare – one of the lead underwriters in the sector – told the London market that the renewals were likely to prove troublesome, given the drop in capacity after hurricanes Ivan, Dennis, Emily, Katrina, Rita and Ike struck the region one after the other.

But as early as 2009, those underwriters brave and contrarian enough to continue offering coverage – with increased retentions and overhauled terms and conditions – found there was still profitable business to be had.

Now that market has run virtually loss-free for a decade, and the rates the early movers were able to secure were far better than those the Johnny-come-latelies managed to achieve in later years.