As firefighters were making progress against the deadly California wildfires that have destroyed more than 10,000 structures and killed at least 27 people in Los Angeles County over several weeks, new fires broke out in the San Diego Mountains with hurricane-force winds blowing across Southern California. The implications for property claims are alarming insurance companies, with repercussions for the entire country.
Many of those who lost their homes in California have been stranded by the lack of insurance options. As many companies have pulled out of the state, residents have to count on the insurance safety net provided by the California Fair Access to Insurance Requirements, or FAIR, Plan, an insurance consortium created 50 years ago, for help. The question has arisen: Will the FAIR Plan or any other insurance program be able to cover those losses?
Andrew Demers, director of communications for the New Hampshire Insurance Department, said the agency “is committed to ensuring Granite Staters have access to adequate and affordable insurance coverage, even as the industry navigates challenges tied to climate-related risks. While New Hampshire is one of 17 states without a FAIR plan, the NHID maintains a stable and competitive insurance marketplace by balancing consumer protections with the financial stability of insurers.”
The current insurance challenges are part of a larger question that Rogan Dwyer, principal and chief executive officer of Waters Insurance Network of Portsmouth and chair of Observatory Strategic Management has been pursuing for years: Is the insurance industry sufficiently capitalized to handle the potential claims from catastrophic fires, pandemic disruptions, automobile liability and cyber crimes?
Waters Insurance Network emphasizes risk mitigation and board room accountability for insurers, and Observatory Strategic Management is a risk mitigation consultancy. As Dwyer looks at the California fires, he sees a threat similar to the combination of the “asbestosis crisis”, the Piper Alpha oil platform explosion off the coast of Scotland, and Hurricane Andrew that nearly brought down Lloyd’s of London, the reinsurance marketplace viewed as a symbol of financial strength, in the 1990s.
“Lloyd’s was overwhelmed by claims which needed to be paid. So the syndicates, including my own, we started paying claims, and we didn’t have the cash flow for that,” Dwyer recalled. “That capital base was individual names mainly within the U.K., who suddenly found, for the first time in 300 years, that they would have to write a check to support that underwriting. A number of those didn’t have the check to write, so Lloyd’s was requiring them to sell their houses and the assets underpinning their membership.”
The insurance industry’s handling of climate-related risks in California and across the country has the same potential for disaster, so Dwyer is seeking answers to what that liability is.
“It’s just some concerns we have, and some observations we’ve made which could have major ramifications,” Dwyer said, “but at the same time, I wouldn’t want to stand up and argue them or present a case for them at this point. It’s more a question of, you know, has this been considered? Whether that’s something you want to talk about at this point.”
He said he would like to know what insurance companies are talking about behind the scenes.
“Knowing insurance, as we do, I’m sure they’ll be looking at ways to minimize their loss. Maybe ways to delay payments, to protect their cash flow, you know, then there’ll be an expectation from the reinsurers that all these considerations have been looked at.”
Among Dwyer’s questions is whether there is collusion going on as to how the insurance industry as a whole addresses the situation in California, and what those conversations might be about.
“One of which is, if you were to present an argument that this was a terrorist attack, be that domestic or international terrorism, then every insurance policy would be null and void, right? And everything would fall back on the federal government” through the Terrorism Risk Insurance Act.
Another way to invalidate an insurance policy is to find the state provided incorrect Public Protection Classifications for fire safety.
“For instance,” Dwyer said, “we have an empty reservoir. We have a certain expectation that, if you have X amount of hydrants, those hydrants would actually have water in them. If you’ve got a hydrant on every corner or even a hydrant for every single large property, you’d expect them to have water, etc. And that will give you a Category 1 on the scale, which is superior fire protection. Well, if there’s no water coming out of them, then they shouldn’t have been rated Class 1. They should have been rated Class 6 or 7.”
California government leaders have said the closure of one reservoir would not impact the state’s ability to provide adequate water, and the loss of water pressure at some of the hydrants was due to the fire having destroyed the electric transmission lines that provide the power to pump water into the system.
“The escape there for insurers is to say this was misrepresented to them through these various agencies,” Dwyer said. “And what was the purpose of that? Was it ignorance? Was it to keep rates down, to serve the so-called public good? It’s that kind of stuff that we just wonder.”
Some insurance companies had already pulled out of California, claiming the insurance commissioner prohibited them from raising rates for vulnerable properties.
Dwyer explained, “They’re the admitted insurers [in the state], so they have to file rates, and those rates have to be approved by the insurance commissioner. Major insurers like State Farm, Allstate, etc., they have rate increases to compensate for the increased aggregation of risk, and that was denied. And I think it was a standoff and a bluff that [Ricardo] Lara, who is the commissioner, refused to countenance, because he was protecting his consumers. And it got to the point where I think State Farm, California Operating Company, was downgraded because of their exposures, and the potential was, that was going to impact the whole State Farm structure.”
Their pulling out was “a seismic shift”, and other insurers followed suit, because the approved rates were unsustainable compared to the risk they were running.
That left California homeowners with the FAIR Plan as their only choice; but that plan is expensive and offers only limited coverage. FAIR Plans are state-run programs financially supported by private insurance companies. Dwyer characterized the FAIR Plan as “the insurer of last resort”.
“It is put together by the state for all those companies operating within California. They are forced to take a share of the FAIR Plan risks and premium, which is generally reduced coverage and at a high price,” he said.
Dwyer said there has to be “an autopsy on the whole situation, to see where these points of failure were, whether they were people, and whose domain they fell into. You know, who was responsible for it.
“But the overall view from the mountaintop, if insurers can present a case that they were misled by the information they relied upon to make their underwriting judgments, there might be an interesting conversation there about whether or not they’re liable.”
It does not stop with California.
“We have fires in New Jersey,” Dwyer pointed out. He said there are ways to combat fire danger — better building codes, for instance. “I don’t think that falls under the province of the insurance commissioner. Ultimately, this leads to much smaller houses, much better building codes.”
Demers addressed the balance between making insurance affordable in New Hampshire and allowing insurance companies to charge enough to cover their financial exposure.
“Rate-setting in New Hampshire follows a rigorous review process,” he explained. “Insurers must submit rate proposals to the NHID for approval, demonstrating that rates are actuarially sound, meaning they adequately reflect risk while remaining fair to policyholders. The NHID carefully reviews these proposals to protect consumers from unjustified rate increases while ensuring insurers can meet their obligations, even in the face of large-scale disasters.”
Insurance Commissioner DJ Bettencourt said, “The NHID is dedicated to protecting Granite State consumers while fostering a resilient and competitive free-market insurance system. We strive to ensure fairness for policyholders and stability for insurers as the industry confronts challenges tied to climate change.”
Even as they confront challenges such as climate change, insurance companies are relying on their status as “too big to fail”, Dwyer said.
“Insurance companies are, to a certain extent, quietly operating under the expectation that, should things go horribly wrong, the federal government will bail them out, because insurance is such a integral part of business. You know, it’s effectively the DNA of business. You can’t operate most types of business in this country unless you’re holding of a certificate of insurance.”
As he sees it, the insurance industry needs to attract new capital. It is “very important at this stage, because a lot of the old legacy capital is deeply impacted by legacy issues,” Dwyer said.
Demers said, “The NHID stands ready to assist consumers who have general questions about coverage,” adding that Granite Staters with specific questions about their insurance policies or rates to contact their agents or the NHID Consumer Services division at 603-271-2261, or by visiting insurance.nh.gov.
