The Economic Impact of Wildfire Events on Rural California
An Analysis by Terry P Rodriguez
Part II: The Consequences
In September, we examined the atmosphere of wildfire threats faced by the people of California as a way of life in our rural areas. Part II explores how the destructive forces of wildfires financially impacts the state government, its residents, and the insurance industry.
Brian Lada, meteorologist and AccuWeather staff writer, indicated in his July 1, 2019 article, "Devastating California Wildfires Predicted to cost US Economy $85 Billion; Containment May Take Weeks," an opinion by AccuWeather President and Chairman Dr. Joel N Myers, stating this point as noted in the title.
Dr. Myers based his prediction on a number of factors: the cost to fight the wildfire; the recovery process; the loss of business tax revenue; the reduced earned income tax revenue due to job losses; increased California taxes to make up for less business tax revenue collected to meet the state's budget; and possible impact on the State of California bond rating, making it more expensive to borrow money to make up for this deficit. In his ominous opinion, Dr. Meyers indicated that if wildfires were not controlled during the 2019 season, that estimate could reach $100 billion. (Brian Lada, 2019).
These tragedies do not end once wildfire is extinguished. The aftermath becomes a period of anguish for those affected who must decide whether to rebuild homes, or not rebuild and leave. Victims endure the painful loss of a lifetime of memories, recovering from injuries, and the irreplaceable loss of lives. All cost money to rebuild, recreate what is possible and tend to the injured and deceased. And these costs are covered either from one's pocketbook, or from their insurance coverage.
The insurance industry is obligated, under their contracts with their policyholders, to cover some of the policyholder’s costs. However, to stay in business to handle future disasters, the insurance company must recover its costs and make a profit or cut their losses by removing their business from hazardous areas they deem unprofitable.
This business reality gave rise to what has become known as the "Insurance Cancellation Epidemic." Crain Content Studio writer Mike Scott, in his article, "California Wildfires' Impact Felt Throughout Insurance, Real Estate Markets," quoted Burns & Wilcox's San Francisco Personal Insurance Underwriting Manager, Tom Carvalho, who indicated that wildfires from 2017-2018 had increased to such severe intensity, insurance companies incurred losses on those policies written on homes within high wildfire risk areas over the entire state of California. As a result, “there are parts of the state where standard carriers are not renewing (policies)….” According to Mike Scott, "billions of dollars of insurance claims" had been filed by those homeowners who were affected by the 2017 wildfire season. Additionally, with the combination of losses over the period 2017-2018, "…Homeowner premiums [will] either increase or not renew" during 2019 among those "1.7 million homes in areas" highly prone to wildfire" (Mike Scott, 2019).
Newsworthy facts…
· 5-8-19: news release by the California Department of Insurance (DOI): reported claims amounted to an estimated $12 Billion in losses and that fire loss assessments were still ongoing as of the time of this reporting (California Department of Insurance, Press Release, May 9, 2019).
· 9-6-18: Against this data, DOI reported wildfire-insured losses in California amounted to approximately $10.5 billion in October 2017 during the "Northern Firestorm Month," $1.8 billion in December 2017, and $8.4 billion in July 2018 with an estimated combined loss of $13.8 billion over this time period (California Department of Insurance News Release, September 6, 2018).
· 4-20-19: DOI news release it was reported in July 2018, wildfire losses amounted to approximately $981 million, and in November 2018, it was estimated at $12.3 billion, for a total of about $13 billion over these two months (California Department of Insurance News Release April 30, 2019).
· The Camp Fire occurred during the month of November 2018. Referencing data compiled by SNL Financial C for use by Moody's Investor Services, noted the top 10 insurance companies doing business in California had approximately 8,045 million homeowner policies, paying an estimated 2017 figure of $8 million in annual premiums. State Farm, Farmers, CSAA, Auto Club, Liberty Mutual and Allstate Insurance companies were policy writers with the highest exposure within what is classified by the State of California as the "wildland-urban interface" (WUI) which were heavily impacted by such losses (Insurance Journal, "Moody's Says California Wildfire Losses Will Impact P/C Insurers, November 29, 2018"). Therefore, the estimated monetary wildfire damage to homeowner's properties far exceeded the amount of premiums collected by the insurance industry who had written these policies in WUI areas.
Clearly, the economic impact of wildfires on our state is not on the state and the insurance industry alone. There is the impact on the citizens of wildfire prone areas and those areas destroyed by wildfires. The next chapters, The Impact on Joe & Jane Doe California Citizen, discusses the financial and personal toll these events dealt to those citizens.