This article was published in June 2022 Edition of Sonoma Marin Farm News
What's Going on in the Insurance Industry
By Sashi Sabaratnam, UCCE Division Manager for Vegetation Management & Jason Majors, Director of Security and Fire Services for Jackson Family Wines
Here in Sonoma County, we are ground zero for the concurrent crises many around the state are facing: the wildfire crisis and the insurance affordability and availability crisis. (For this piece we won't get into housing and climate crises that are also concurrent.) So much is happening locally and at the state level, so this topic is a bit of a moving target. Expect things to change over the next year, but here is a overview of where we are now and what policy decisions are being contemplated.
Insurance Cancellations, Rate Hikes, and the FAIR Plan
According to actuarial research firm Milliman, the insurance availability crisis is the result of a
combination of factors that caused insurers to cancel policies or deny new applications:
- California regulations mandate that insurance be priced based on a historical average of catastrophe losses, with no consideration for predictive risk based on scientific data and current conditions. Oddly, predictive modeling is allowed for earthquakes, but not fires.
- Milliman estimated that the 2017 and 2018 fires alone wiped out 26 years' worth of insurance industry profits, leaving insurers with no way to recover those losses through pricing increases.
- Reinsurers also raised their rates, adding further financial pressure to insurers.
Instead of allowing the increased risk to be priced in over multiple years to cover losses, the California regulations perversely allowed steep price increases only once significant losses from wildfire occurred over multiple years, as was the case in Sonoma. Some owners were left with the insurance of last resort, the California FAIR plan, which is only intended to be a “temporary safety net,” has limited coverage, and can be hugely expensive.
Some Indication of Good News To Come
In the last year, the Department of Insurance has approved 91 personal homeowners insurance rate filings, a possible indication that insurers are more willing to rebuild the market. The Insurance Commissioner released the Safer From Wildfires Framework, an interagency partnership with the Office of Emergency Services to lay out science-based standards to help homeowners understand what they can do to mitigate wildfire risk. Various insurers also offered discounts through the program. Changing the pricing regulations may include considering underlying conditions and data within a catastrophe simulation model, also known as CAT modeling. If CAT modeling were allowed for fires as it is for earthquakes, insurers would be more likely to recover their costs over time, and also more likely to consider discounts if landowners perform mitigation work that can be shown to reduce the risk within their own modeling. Analysis by the California State Senate Insurance Committee seems to support CAT modeling, although it acknowledges this is not a perfect solution.
What's In the Works
The Department of Insurance is in the midst of a rulemaking hearing on the effect of wildfire mitigations and use of risk models. Until this is resolved, there will be uncertainty in the insurance market. Without changes in the pricing regulations, insurers will be unable to effectively price in the effects of mitigations performed by landowners, so this hearing somewhat puts the cart before the horse.
In addition, the Board of Forestry is working on regulations for AB 3074, which requires a five-foot non-combustible zone around structures in high severity fire risk zones. These regulations are using the same research from the Insurance Institute of Business & Home Safety that underpins the Safer From Wildfires Framework and the CalFire Zone Zero regulations required by AB 38.
What You Can Do
In addition to the mitigations we can do around our homes, those in agriculture can consider what wildfire mitigations are appropriate for their properties. Jason Majors, director of fire services for Jackson Family Wineries, offered these tips:
- Consider the timing of projects to limit possible ignitions. Looking at the weather and relative humidity, you may consider timing of “hot work” before 1 pm when it is cooler and planning the work when conditions are less favorable to fire.
- Be prepared to put out small fires. In the eventa fire does start, have the tools on hand to immediately put it out.
- Empower staff to call 911. The risk to rural communities from fire that started in ag land means it is important for staff to be empowered to call 911 and accurately report the address so the fire department can do their work to prevent the fire from spreading.
- Install a 1 ½” hose conversion fitting for water sources. Enabling on-site water sources to be used by the fire service could be as simple as zip-tying the conversion to the pipe and informing your fire department what is available.
- Maintain a relationship with your fire department. Making sure your fire department knows the resources available, including water and road access, could make all the difference in a fire.
It's also critically important to periodically evaluate whether we have enough insurance to cover replacement of our losses. As many in Sonoma County know, being underinsured in a disaster can be a startling blow.
Following the Department of Insurance rulemaking hearings and the upcoming election of the state insurance commissioner, there is a potential for some positive changes, including the ability to reconsider the insurance pricing regulations. It's hard to predict any specifics at this point, but it is likely that these changes will have significant effects on the availability and affordability of insurance for both homes and agriculture throughout the state.
- California Code of Regulations § 2644.5: https://govt.westlaw.com/calregs/Document/I4909DB30D49211DEBC02831C6D6C108E? viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)