SOURCE :- THE AGE NEWS
The catastrophic fires razing multimillion-dollar homes in Los Angeles are expected to cost insurers more than $32 billion, making it one of the costliest natural disasters in US history with potentially global consequences for the industry.
The hefty payouts will come at a time when US insurance companies are already pulling out of the Californian market because of the rising cost of natural catastrophes and pricing regulations that keep premiums artificially low.
Homes bordering the Pacific Ocean are burnt to the ground in the aftermath of the Palisades fire in the Pacific Palisades neighbourhood of Los Angeles.Credit: AP
Alix Pearce, general manager of climate, social policy and international engagement at the Insurance Council of Australia, said Australia and California were both bearing the brunt of “intensifying flooding and ferocious fire seasons fuelled by a changing climate”. They shared the challenge of maintaining affordability and availability of home insurance.
“The current LA fires will add further pressure to California’s embattled home insurance market, which has seen a number of major insurers stop writing new home insurance policies,” Pearce said.
“This has significantly shrunk home owners’ options to protect their properties at a time when California is becoming more exposed to worsening bushfires and other extreme weather events.”
On Friday morning Australian time, analysts at JPMorgan Chase & Co issued a client briefing note predicting insurance claims would surpass $US20 billion ($32.3 billion) – double the $US10 billion they predicted a day earlier. They said losses could rise further if the fires are not controlled.
However, the total damage and economic losses – including uninsured destruction and indirect economic impact – will land somewhere between $US52 billion and $US57 billion, based on a preliminary estimate from AccuWeather.
A structure burns in the Pacific Palisades neighbourhood on Thursday.Credit: AP
The “protection gap” – the extent to which economic losses are not covered by insurance – has been growing globally. Global reinsurer Swiss Re estimates that three-quarters of global disaster exposure is not protected by insurance and the gap is now $US385 billion.
Australia remains relatively well insured. Swiss Re estimates the local protection gap for natural catastrophe losses over the decade 2014-23 is $US12 billion, or one-third of the total cost.
For now, Hurricane Katrina in New Orleans in 2005 remains the United States’ most expensive natural disaster, costing more than $US60 billion in insured losses and more than $US125 billion when uninsured losses are included.
The 2018 Butte County Camp fires in 2018, which cost $US10 billion in insurance claims, was California’s costliest fire event until now.
This is vastly more than any Australian disasters. Figures from the Insurance Council show the 2022 floods in south-east Queensland and northern NSW were the costliest insurance event this century, with payouts totalling $6.3 billion. The Black Summer bushfires of 2019-20 cost $2.4 billion.
Over the last 30 years the average insured losses of bushfires in Australia were $220 million per year, the Insurance Council said, but in the last five years the average annual incurred cost has been more than $560 million. The average annual cost of flood alone jumped from $620 million over the 30-year average to $2.2 billion in the past five years.
Insurance industry consultant John Trowbridge said the insurance costs were tied to the value of the properties as well as the number of claims. The LA fires would be more costly for an insurer than a fire that destroyed the same number of less expensive homes.
“Quite often you get bushfires where there’s not much property damage, but with growing population and growing community wealth and economic development, it can lead to much more exposure to some of these risks,” he said.
Insurance companies typically buy reinsurance – or insurance for themselves – to mitigate their own risk.
Trowbridge said reinsurers would not directly cross-subsidise one region with another, but high losses could have an impact on prices globally.
An Insurance Council spokesperson said the global reinsurance industry was stressed, with reinsurers failing to earn their cost of capital in five of the last six years. This had pushed global reinsurance costs to 20-year highs last year, and Australian insurers faced cost increases of up to 30 per cent.
There are two reasons behind the growing crisis in California’s home insurance market, one shared with Australia and the other not.
The 2022 floods in south-east Queensland and northern NSW were Australia’s costliest insurance event this century.Credit: Elise Derwin
The first is that climate change has made fires, floods and windstorms more common and damaging. Of the top 20 most destructive wildfires in California’s history, at least 15 occurred since 2015, not including the LA fires this week.
The second is regulation. Unlike Australia, California previously did not let insurance companies factor in current or future risks when deciding how much to charge. This kept premiums artificially low, and many companies said this was the reason for their retreat from the market.
In 2023, seven of the 12 largest insurance companies by market share in California either paused or restricted issuing new policies in the state.
One of the most affected areas was Pacific Palisades, a wealthy ocean enclave that had already been identified as a major fire risk by state officials before last week. Major insurer State Farm reportedly dropped up to 70 per cent of its policies in the area last year.
Californian legislators have been trying to reform the sector, giving insurers more latitude to raise premiums in exchange for issuing policies in high-risk areas.
From this month, insurers can consider climate change when setting their prices. The state is also in the final stage of approving a rule that would let insurance companies pass on the costs of reinsurance to California consumers.
California is the only US state that did not already allow the cost of reinsurance to be borne by policyholders.
In response, Farmers, the second-largest insurer in the state, resumed writing new policies for homeowners last month.
Many homeowners have flocked to California’s FAIR Plan, the government-backed last-resort insurer. The number of FAIR residential policies issued in the state more than doubled between 2020 and 2024, reaching nearly 452,000 policies.
However, the policies only cover basic property damage and carry a $US3 million limit, below the $US3.3 million median price of a home in Pacific Palisades.
Trowbridge said Australian insurance companies offered individual pricing based on a property’s risk, but there were also places where there was “no insurance available or it was at such a high price that people can’t realistically pay it or won’t”. He said this applied mostly to flood risk because it was easier to model than bushfires.
