S&P Updates Insurer Impact of Calif. Wildfires

Insurers of homes and business are expecting thousands of claims to arise from more than a dozen wildfires that have burned half a million acres and destroyed 2,000 homes in Southern California.

If no further significant damage were to occur, it is unlikely that
claims would affect insurer credit ratings, according to analysts at Standard & Poor’s Rating Services. However, until the fires are under control, this is an evolving story.

As of Oct. 29, 2003, total estimated losses were approaching $1 billion, with seven insurance groups facing virtually all of this exposure. The six rated by Standard & Poor’s – Allstate, Farmers, Nationwide, SAFECO, State Farm, and USAA – are all national players and therefore are reportedly largely insulated from concentration of risk from a single area.

If current estimates are exceeded, the event would reportedly be of the same order of magnitude for homeowners’ insurance carriers as Hurricane Isabel, which touched down on the eastern coast of the U.S. on Sept. 18. At current estimates, losses would be insufficient to trigger significant payments from reinsurance companies to insurers.

Standard & Poor’s credit analyst Polina Chernyak also compares the current spate of blazes with those that swept the same region in 1993. Burning from Los Angeles to the Mexico border, those fires caused insurance losses of about $1 billion but had no ratings impact.

Although California has not reportedly been a hospitable state for insurers providing workers’ compensation and liability coverages, home insurance has been relatively profitable, helped in part by a lower incidence of catastrophic losses.

Insurers’ direct loss ratio claims payments (excluding related costs and reinsurance considerations) divided by net premiums was 59 percent in 2002, which is better than the national average by 7 percentage points. At current estimates, wildfire losses would add only one or two percentage points to the loss ratio.

A mitigating factor for insurers is the substantial rate increases being
realized for most property and liability coverages. Premium income for insurers nationwide rose about 11 percent in the first half of 2003 relative to the same period in the prior year.

Chernyak cautions, however, that wildfire loss estimates are necessarily preliminary, as the fires have not yet been contained.

In addition to the primary risk in homeowners’ coverage, insurers face smaller exposures in automobile coverage as well as in commercial general liability and commercial multiple peril lines. If fires reach resort locations in the mountains, more commercial property will be exposed to loss.