Bracing for the Worst: Industry Prepares for Another Wildfire Season

The fire season started early this year. Wildfires erupted all over California and in Nevada in mid-July, forcing thousands to evacuate and destroying several homes and outbuildings. Affected areas in California included northwest Los Angeles County, Riverside County, Palm Springs, Lake Hughes, Stanislaus County and the Santa Clarita Valley, with the fires charring approximately 40,000 acres. In Carson City, Nev., the Waterfall Fire claimed 15 homes and burned more than 8,700 acres.

Industry experts predict that the 2004 fire season may be more devastating than last year, when 22 people lost their lives, over 3,700 homes and buildings were destroyed and 740,000 acres of Southern California were blackened.

“All indications are that this year is going to be even worse than last year,” said Pete Moraga, spokesman for the Insurance Information Network of California (IINC). “We have the same problems we had last year only now it’s a year more of drought, a year more of bark beetle infestation up in the forests and another year of a lot of our wild land that hasn’t burned.”

Insurance companies are bracing for the worst, becoming more cautious and scrutinizing each risk before deciding to underwrite or renew a policy. As a result, consumers are becoming proactive, taking extra protective measures to secure homeowners insurance.

Responding to the recent fires: Stricter underwriting practices
Many carriers have responded to the recent wildfires by honoring old policies and not writing new ones until the fires have subsided. “We have seen moratoriums placed immediately upon the starting of fires,” said Gene Brouillette, vice president of Brouillette Insurance Services in San Diego. “This is the proper response and I am sure it will continue.”

Jerry Davies, director of communications at the Personal Insurance Federation of California (PIFC), said that insurers have learned the importance of responding immediately when policyholders have been affected by wildfires and may have suffered losses.

“Insurance companies in the most recent fires are on the scene,” he said. “They get in there immediately now based on the experiences they’ve had in the last decade and they are contacting their policyholders and working closely with them to make sure that they have immediate needs met under their policy. They are in constant touch with them. Now who is in touch? The agent is, of course, and the claims adjusters.”

Despite the most recent fires in Santa Clarita, most companies are not pulling out of certain areas in California, according to Brouillette. “Companies which we represent, including Chubb, Allied, Safeco, Travelers and Mercury remain active in the writing of new business,” he said. “Carriers represented by this agency have not pulled out of any of our writing areas. Our companies are being very cautious and diligent in assessing the brush issues.”

Insurers’ underwriting practices are becoming more strict, especially in Wildland-Urban Interface areas, according to Davies. The California Department of Forestry estimates that a million people a year are moving into forested and brush areas, affecting the way that insurance companies look at each risk.

“Insurance companies, because of the experiences of these fires, are now taking a look at their policyholders,” Davies said. “Insurance companies are looking closer at the risks, especially in the urban wild land fire areas and are determining whether they’re actually going to underwrite or issue a policy in some of these areas based on criteria that each company now has.”

That criteria may include the ingress and egress to the properties and access to water. Davies said that narrow roads have been an ongoing problem since the Oakland Fires of ’91. Another lesson learned from recent fires is that there was inadequate water pressure in some areas.

More important to carriers, however, is how far a home is from brush.

“Distance from brush has been reduced in most cases from a year ago, but most preferred companies require brush clearance to be a minimum of 250 ft. to 500 ft.,” Brouillette said. “Risks located near canyons require a minimum clearance of 1,000 ft.”

Insurance companies also look at a home’s “defensible space” when evaluating a risk. “The law basically says today that you’ve got to have a minimum of 30 feet around your house,” Davies said. “But the more out of 30 feet you get the better you are.”

Brouillette said that consumers should take a proactive approach when insuring their homes and make sure they have defensible space around their homes.

“We have gotten calls from homeowners who believe our industry should be more understanding about brush, stating everyone should have the availability of product regardless of lack of protective measures taken by the homeowner,” he said. “My opinion is our industry is not a social institution. Every homeowner has the responsibility of protecting their home or suffer the consequences.”

Companies may not be as strict in their underwriting practices in urban areas, Davies said.

“When you get into the urban city areas, it may be different, it may not be as strict,” he said. “The companies still have their individual criteria that [consumers] must meet,” which agents should find out and communicate to their clients.

Assessing the risk
How can insurance companies and agents correctly assess the risk of homes? How can they find out if homes are in a high-risk area?

Traditionally, agents have consulted brush atlases or conducted inspections, but these methods have often proved incomplete and inaccurate in truly assessing a risk.

Bill Raichle, assistant vice president of risk decision information for ISO, said that new methods in technology have enabled agents and insurance companies to quickly and accurately assess a home’s fire risk through a software product called Fireline.

The company uses satellite imagery and GPS devices to identify the different types of brush in areas all around the state. The software takes into account the three major contributors to the hazard.

“The Fireline product creates a model that not only combines the fuel but also slope and road access problems and identifies hazard areas that even an inspector might not find,” Raichle said. “And Fireline is the only database that we know of that accurately covers the entire state.”

ISO conducted a study after the 2003 Southern California wildfires to test the accuracy of its Fireline software and found that 97.5 percent of the areas that burned were identified by Fireline as being exposed to the wildfire hazard. Raichle said that brush atlases were not nearly as accurate, providing only a 10 percent correlation to the areas that burned.

“We feel very confident that the database that we produce, that the Fireline data itself, does a tremendous job of identifying where that hazard is,” he said. ‘We have the technology, it’s here today to really identify where this hazard is and it does so with a level of precision that’s unprecedented.”

Fireline has been used by insurance companies and agents since 1998 and will expand into eight additional western states in the coming months, including Nevada, Colorado, Utah, New Mexico, Oregon, Washington, Arizona, and Idaho.

High-risk homes in California, Nevada
Due to stricter underwriting practices, it is possible that insurers will refuse to write homeowners policies for consumers in high-risk fire areas. The consumer can then try to secure coverage through the excess and surplus market. If that attempt proves unsuccessful, consumers can turn to the property insurer of last resort, The California Fair Access to Insurance Requirements (FAIR) Plan.

The FAIR Plan is sponsored by the insurance industry and coverage is generally available in designated brush areas throughout the state. Some counties, however, such as San Diego, are not included in the FAIR Plan’s designated brush areas despite the countywide devastation caused by last year’s wildfires.

Insurance Commissioner John Garamendi expressed interest in expanding the FAIR Plan’s designated brush areas.

“We are currently studying that issue and we’ll shortly make a recommendation that will expand the FAIR Plan into areas that the insurance industry is moving out of,” he said.

“I think an insurance company should be required to assess the risk of a home on a case by case basis and not redline an entire area,” Garamendi continued. “If they find an individual specific home to be too risky because of the geography or the vegetation or the nature of the home itself, then they certainly have the right to not insure or to price the insurance at a level commensurate with the risk. I do object to decisions that would blanket an entire area as a no-insurance area. I think that’s both unwise and unnecessary.”

Garamendi also emphasized that the FAIR Plan is available to any consumer who has received three written rejections from insurers, no matter where the consumer lives in the state.

Unlike California, Nevada does not have a property insurer of last resort such as the FAIR Plan. There is no real need for a FAIR Plan for Nevada consumers, according to Chuck Knaus, spokesman for the Nevada Division of Insurance.

“It is something that has been discussed at 10-year intervals in the Nevada Legislature in my experience,” he said. “It’s not an ongoing topic, but it’s not a new topic either, and every time it’s come up we don’t think it’s needed.”

He said that consumers who live in a brush environment have not had a problem finding adequate coverage.

“We have not had any questions over the last few years from consumers on that,” Knaus said. “We have had an innuendo from State Farm. They’ve begun to look at the Lake Tahoe area and they have a proactive program of telling people how to clear out brush and everything. The contacts that we have had are on the other side, where the insurance companies are looking at people’s brush areas and they’re telling them what they can do to make their home less likely to be a fire target.”
Tips every agent must share with consumers

“Last October’s wildfires should be kind of an eye opener and a wake-up call to Californians,” Moraga said.

“More than half of all of the homes in California are in the top three tiers of wildfire danger,” he continued. “There are 12.5 million homes in California and the California Department of Forestry estimates that 7.2 million are categorized as the three highest fire risk levels. More than 6 million of these are actually located in what are traditionally called urban areas. The estimate of this potential loss would be in excess of $106 billion.”

One of the major lessons learned from the 2003 Southern California wildfires was that many consumers were underinsured. The cost of replacing a victim’s home often outstripped the homeowners’ policy limits. As components of Garamendi’s Homeowner Bill of Rights legislation make their way through the Legislature and wildfire victims question the insurance industry’s cost calculators, industry representatives recommended consumers protect themselves against future catastrophes.

Here are some consumer tips that agents should communicate to their clients to reduce the problem of underinsurance:

1) Re-read and understand your homeowners insurance policy.
“If you don’t understand it, ask questions or get an explanation from your agent or your broker,” Moraga said. “It isn’t until a catastrophe that [insureds] realize that maybe they don’t have the right coverage.”

2) Update your policy yearly to reflect home upgrades, inflation and changes in construction costs and building codes. “Many people who have owned their home for 10 or 15 years have not reassessed the coverage that they have and it has not kept pace with their home,” Moraga said.

“When you create an addition or you do upgrading (for example changing a regular floor to a wood floor) you need to let your insurance broker or agent know because that could change the value or the cost of reconstruction in the event that you have a total loss.”

Brouillette said that reconstruction costs have increased significantly and must be revisited on an annual basis. “The old thinking of 3-5 percent per year is no longer even close to being adequate. If you are insured for less than $150 per square foot, you could be in for an unpleasant surprise if confronted with a total loss of property,” he said.

3) Get the proper level of coverage for your home in case of a total loss. “It’s clear from the Southern California firestorms that people did not know the true cost of reconstruction in case of total loss and had not made an informed decision about the level of coverage that they wanted,” Garamendi said. “So the first issue is call your broker or agent and make sure that you have sufficient coverage. If the agent or broker is not able or willing to give you that information then an outside source of information should be made available and used to determine and then an informed decision made.”

4) Maintain an updated inventory of personal belongings. Take pictures or videotape all of the items in your home and how much they are worth. Store the inventor and insurance policy outside of your home in a safe place.

Topics California Catastrophe Natural Disasters Carriers Agencies Wildfire Underwriting Homeowners Market