Wildfires More Likely to Trigger P/C Industry Changes Than Hurricanes, says Blake Berman, RU40s Member

Reposted from Best’s News Service dated Nov 15, 2017

A record-setting wildfire season in California is more likely to trigger U.S. property/casualty changes than the three major hurricanes that hit the country, according to a Guy Carpenter & Co. LLC senior vice president of North American strategic advisory.

Hurricanes are a “very heavily modeled peril,” and this year’s losses are likely within the realm of expectation, said Blake Berman, author of a Guy Carpenter annual report on insurance risk benchmarks. Insurers don’t have the same modeling capacity for wildfires. Berman said the insurance industry, particularly in terms of modeling, is “still building our understanding” of wildfires. He said he thinks underwriters will look more closely at risk factors such as a structure’s distance from tree or brush lines before writing policies.

“It’s getting increasingly dry in parts of our country,” he told Best’s News Service. “The wildfire activity is unprecedented this year,” and follows high losses in other recent years.  Seven of the top 20 most-destructive and five of the deadliest wildfires in California have occurred over the past three years, including the Tubbs Fire in October. It claimed 5,643 structures and 21 lives, according to the California Department of Forestry and Fire Protection (Cal Fire). The National Interagency Fire Center reported 53,986 fires through Nov. 10, fewer than the 10-year average of 64,388. However, the 8.88 million acres burned is significantly higher than the 10-year average of 6.81 million acres. It is the second-highest number after the record-setting 2015 wildfire season.

Five years of severe drought in California left many forests less resilient to wildfire (Best’s News Service, July 21, 2017). At the same time, Berman said, there has been a shift in population away from the Northeast and some rust-belt states to areas with more favorable weather and lower taxes. Some popular areas are catastrophe-prone, whether it’s hail in Colorado or Texas, hurricanes in Texas and Florida or wildfires in California.

The wildland-urban interface contains about one third of U.S. housing units, then-U.S. Forest Service Chief Tom Tidwell said earlier this year in a speech. Fast-growing areas with moderate- to high-wildfire potential range from the South to “large parts” of the West. “Across many of these degraded landscapes, fuel buildups have created explosive conditions made worse by the effects of climate change, such as drought and insect epidemics. Fires are getting bigger than ever before, with more extreme fire behavior,” he said.

The fires followed a third quarter in which three Category 4 hurricanes made landfall in the United States and two earthquakes shook Central Mexico. The property/casualty industry posted a 0.4% underwriting loss in 2016, its first calendar-year loss since 2012, which the Guy Carpenter report attributed to emerging risks, catastrophe frequency and severity and changing capital needs (Best’s News Service, Oct. 24, 2017).  Adverse reserve development in a small number of large but influential lines was a factor, said Berman. The median accident year loss ratio among personal lines carriers increased 3% since 2013, according to the report, with private passenger automobile and commercial auto liability writers netting median combined ratios of 107. The homeowners market continued to perform strongly last year, a lift it likely lost this this year due to the string of catastrophes, said Berman. Commercial liability “continued to see an uptick in losses,” last year, Berman said. The industry’s 10-year run of favorable prior-period reserve development ended in 2016. Ongoing improvements in workers’ compensation improved overall results last year. And stock market gains “have had a very soothing effect” on performance, masking some reductions in underlying underwriting profitability.

One surprise was the industry expense ratio. Guy Carpenter expected it to decline at a quicker rate as companies adopted new technologies and better distribution strategies. He said he thinks insurers instead have used technology to maintain or reduce prices while improving services such as claims management and increasing consumer engagement options.

“The market never really stands still in the property and casualty industry,” Berman said.

The top five writers of homeowners multiperil in the United States in 2016, based on direct premiums written, were: State Farm Group, with an 19.26% market share; Allstate Insurance Group, 8.64%; Liberty Mutual Insurance Cos., 6.81%; Farmers Insurance Group, 6.03%; and USAA Group, 5.84%, according to BestLink.