California Wildfire Claims Top 14,000

As insurers' claim count from the California wildfires soared above 14,000 and modelers said insured losses could hit $1.6 billion, a reinsurance expert suggested last week that carriers should have an easier time collecting on their reinsurance coverage than they did in 2003.

Lara Mowery, Guy Carpenter managing director in the reinsurance brokerage's Minneapolis office, said changes in contract documents since 2003 should lessen the number of disputes over California wildfire losses between reinsurers and primary insurers.

There has been an “evolving definition” of reinsurance coverage for wildfires, she explained.

At the same time, Moody's Investors Service, a rating agency in New York, said it expects claims against reinsurers to be minimal.

Ms. Mowery said that after California's 2003 blazes some primary insurers claimed that simultaneous fires with many separate ignition points qualified as one occurrence because all the fires were based on the same “drought condition causation.”

If the different blazes were combined under one retention, it would create a higher loss figure triggering the reinsurance coverage, she noted.

As a consequence, Ms. Mowery said reinsurance brush fire contracts were developed allowing an insurer to pick a center point for a contract with coverage extending in a 150-mile radius from that location, and anything within that circle qualifies for one event.

According to Moody's Investors Service, for most primary carriers, losses from the 2007 fires will generally not attach the retentions of their catastrophe reinsurance programs.

The rating service said this was based on the fact that catastrophe retentions, which have increased since the 2005 storm season, are structured to provide risk transfer for larger severity events such as hurricanes and earthquakes.

Moody's said that since U.S. residential lines carriers have historically retained nearly 90 percent of premiums written, it does not expect insurers with wildfire losses to make meaningful recoveries under any proportional or risk excess reinsurance treaties.

Moody's noted that a significant portion of California homeowners' business in wildfire zones is written by excess and surplus lines carriers. As a result, Moody's said it does not expect that admitted carriers will incur wildfire losses that match their share of premiums in the overall market.

Likewise, Dan Munson, vice president of sales and marketing for Boston-based CDS Business Mapping, said more E&S insurers would be impacted than in 2003, because after that record wildfire season producing $1.1 billion in losses in California, insurers tightened up their underbrush underwriting guidelines, no longer taking the agent's word for conditions and ending exceptions.

Because the standard carriers tightened their underwriting, “the E&S market had to pick up the slack,” he said.

But because Santa Anna winds have flung embers and flames great distances, even companies that wouldn't write home coverage within a quarter mile of brush will be impacted, he predicted.

The Insurance Information Network of California said roughly 14,000 insurance claims have been filed. IINC and Insurance Information Institute in New York said that insurers may pay up to $1.6 billion for wind and fire damage to homes, farms, vehicles and businesses.

State Farm, the state's largest home insurer, said on Wednesday that it had logged over 4,300 claims for structures hit by fire with about 590 of those totally destroyed. The insurer also reported 560 auto claims with over 130 of those involving total destruction.

According to Robert P. Hartwig, Insurance Information Institute president, the tragedy of the fires may have a silver lining. Mr. Hartwig, an economist, said the ultimate economic benefit to the state “could total $3 billion to $4.5 billion.”

California's economy, he said, would receive “a much needed injection of insurer capital that will help revive its construction and homebuilding industries; boost the retail, service, hotel and restaurant sectors; and in turn increase tax revenues for local, state and federal governments.”

While the wildfires “were undeniably a tragic event, the rebuilding, repair and cleanup that follows will at least provide employment to thousands of Californians for many months to come,” Mr. Hartwig said.

Earlier in the week, experts and attorneys expressed opposing views on the potential for claims litigation involving primary insurers that might develop in the aftermath of the fires.

Mr. Munson took note of the lawsuits that developed in 2003 brought by homeowners that did not have adequate insurance to rebuild their homes, but said he does not expect a repeat because “most carriers have implemented replacement cost calculators or improved the ones they already had.”

However, Ray Bourhis, a partner in a San Francisco law firm, said issues are likely to emerge involving policies that underinsure the value of the home, statute-of-limitation questions when suits are eventually filed and estimates of damage.

Mr. Bourhis has set up a Web site (www.insuranceconsumers.com) that gives policyholders suggestions on how to deal with insurers and warns them to be wary. He said insurers frequently provide estimates for replacement costs that are far too low.

Gene Weisberg, a Marina Del Rey attorney who represents insurers, said insurers and brokers as well as policyholders “have learned from past experience regarding the need to insure property to value.”

Policyholders have increased awareness of the importance of buying adequate insurance limits and the need to periodically review those limits, he said.

According to an estimate from California Insurance Commissioner Steve Poizner, perhaps a quarter of the homes destroyed by fire are underinsured.