Expensive homes in California lose insurance coverage due to wildfire risk

Some high-end homes in California are losing insurance coverage due to wildfire risk (iStock)

Expensive homes in California will soon have fewer insurers ready to protect them in the event of wildfires.

Insurance companies concerned about wildfire exposure have scaled back landlord business, with two of the biggest companies ending coverage for some multimillion-dollar estates, according to the Wall Street Journal.

American International Group plans to notify 9,000 customers of its Private Client Group that their home insurance policies will not be renewed. Chubb, the state’s largest premium insurer, is choosing not to renew some policies.

Chubb chief executive Evan Greenberg said on an earnings call last fall that the contraction was “not insignificant” in areas “both highly exposed and even moderately exposed to wildfires.” .

“Someone else will have the pleasure of writing ‘business’ for which ‘we cannot charge an adequate price for the risk,’ he said.

AIG said some customers may be eligible for coverage through a less regulated unit of the business – although their policies may cost three to five times as much, brokers say, with less generous coverage.

“AIG is the first wealthy carrier to say, ‘We got it, we’re separating from the California regulated market,'” said Jim Tolliver, a San Francisco insurance broker with Woodruff Sawyer & Co.

Others may soon follow suit, he said. The non-renewals by AIG and Chubb follow years of policy cuts by mass-market insurers. Climate change may be a factor.

Five of California’s 10 largest wildfires on record occurred in 2020, and the state set a new record for acres burned, according to NASA’s Jet Propulsion Laboratory in Pasadena. More than 9,600 wildfires have scorched nearly 4.2 million acres through mid-December, killing more than 30 and damaging or destroying nearly 10,500 structures.

Such conflagrations have damaged the luxury real estate market in Los Angeles, dramatically increasing the cost of homeowners insurance and shrinking the pool of buyers, realtors say.

Some insurers say they are frustrated with California regulations that require them to set homeowners insurance rates based on their historical losses, not projections of future losses, determined by models of disasters such as wildfires.

State regulators say insurers can get adequate rate increases under the current system and have expressed concern about the accuracy and fairness of modeling to minorities.

The state Department of Insurance approved an average rate increase of 17.5% for AIG home insurance policies in 2020. AIG is now seeking a 42% raise.

Finding coverage to replace non-renewing policies can be difficult, especially for larger, more expensive homes.

“I’m sure there’s enough blame for everyone: the insurance department, the insurance companies, the policyholders,” Jeffrey Green, chief executive of a financial services company who lives in County Napa and is subject to AIG non-renewals this year, the Journal told.

But “you are going to devastate people if they are uninsured and their houses burn down.”

Even if they burn, insurance coverage may not be enough to replace them. After wildfires ripped through Denver and Boulder suburbs this month, many homeowners found their coverage was insufficient to replace damaged or destroyed homes.

[WSJ] – Dana Barthelemy

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Justin D. O'Neill