After the fires

The damage from the devastating Los Angeles wildfires shocked the world and raised important questions about the insurance industry’s response to natural disasters. Twenty-four people died in the inferno, thousands more were displaced, while over 12,000 homes were destroyed, worsening an ongoing housing crisis. Rebuilding fire damaged areas could take a decade and cost billions of dollars.

The fires were another wakeup call for the global insurance sector, as they exposed complex risk management levels and the impact of climate change on business models. With the clean-up now underway, insurers are dealing with an unprecedented level of claims. Premiums had already risen significantly, especially in high-risk areas, but insured losses of between $20 billion to $40 billion from estimated damages of $250 billion, mean the LA wildfires will be go down as the costliest in US history. As the differences between insured and uninsured losses (the so-called insurance protection gap) are already high, it is almost certain that companies will further limit the cover they offer to those living in areas affected by climate change. Moreover, California FAIR Plan the state’s insurer of last resort that provides basic cover not offered by traditional carriers, is on the edge of insolvency with estimated losses of between $6 billion to $8 billion. Market instability would follow if the scheme collapsed while global insurers would find themselves under increasing pressure to fill the coverage gap. Parametric Insurance is one way forward as it pays out a predetermined amount of money on specific events, like wildfires. But the rules around this product are still evolving and there’s a risk of payouts not matching losses if the data triggering the disbursement is inaccurate or outdated.

With global temperatures expected to rise significantly in the next ten years, complacency is not an option. Insurers will have to ramp up their investments in risk management and mitigation strategies, including the promotion of sustainable building practices and enhanced predictive modelling capabilities. It won’t be cheap which means that policyholders on this side of the pond should brace themselves for higher premiums, tougher underwriting criteria, and coverage limitations (especially for properties in areas prone to natural disasters). There is also the matter of comprehensive coverage that includes protection against secondary risks, such as the landslides that follow a wildfire or flood.

So, how should UK insurance policy holders prepare themselves for what lies ahead? Start by reviewing existing policy documents to make sure that cover is adequate, especially if you live in an area with additional risks. It’s almost certainly worth doing as some insurance policies exclude cover for certain types of damage. Buying additional cover is also a good move (especially if it’s justified by the risk profile), and although this might be an expensive option there’s no harm in shopping around for something affordable. Finally, talk to the insurance provider about any possible changes to a policy or premium, especially if there are queries over how force majeure is interpreted in a contract. Remember, your home is a valuable asset and protecting it brings peace of mind.