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More frequent and severe California wildfires will require a fresh approach to managing and underwriting power and utilities risks, experts say.
The sheer scale of 2017 and 2018 wildfire activity across the Western U.S., with multiple fires and fatalities and billions of dollars in losses, means that utilities with California wildfire exposure can expect further rate increases amid tightening conditions and capacity, experts say.
“From an industry standpoint both from the utilities’ side and from the insurers’ side, it’s really a question of is this becoming the new normal?” said Tampa, Florida-based Peter McGoldrick, senior vice president of the power team at Lockton Cos. LLC.
While historically underwriters have viewed wildfire as an infrequent but catastrophic risk, “now if it’s becoming an annual, much more frequent event that does become game-changing,” said Mr. McGoldrick.
The last couple of California wildfire seasons have been “a blur,” according to Bruce Arita, a senior vice president and practice leader for the risk and property loss division at engineering consulting firm Thornton Tomasetti Inc. in Los Angeles.
“There’s no longer any distinction between fire season and non-fire season. It seems like it’s going throughout the year,” said Mr. Arita.
The year-long drought in California, the expansion of housing into the wildland urban interface and the need to provide power to those areas, has created a confluence of exposures, according to Mr. Arita. “This has overwhelmed the ability of utilities to manage the risks, and to make sure the grid is safe from wind and falling trees,” he said.
“It has created almost a greater risk at a time when ironically the utilities have been trying to invest in renewables and sustainable energy. It’s been a real eye-opening experience for everybody in the underwriting world today,” said Mr. Arita.
The situation is exacerbated by the expected bankruptcy of PG&E Corp. amid $30 billion in wildfire liabilities, sources say.
If PG&E’s facilities, including its transmission lines, are determined to be the substantial cause of a particular wildfire, then “the utility can be held liable for insurer losses related to property damage, business interruption, and loss adjustment expenses including attorney fees,” rating agency Moody’s Corp. said in a report last Friday.
Insured losses to homes and businesses from the November 2018 Camp, Woolsey and Hill wildfires have risen by 25% to $11.4 billion to date, California Insurance Commissioner Ricardo Lara said Monday. The $11.4 billion insured loss figure is up more than $2.3 billion from the department’s initial estimate in December, according to the statement.
It is still too early to know the long-term market impact of the 2018 California wildfire season, according to energy brokers and underwriters, but rates will continue to go up for casualty risks in the utilities sector, experts say.
“Rates over the last five years for limits around California wildfires have continued to trend upwards, so I would expect that to continue in light of 2018,” said Mr. McGoldrick.
Rates have been gradually increasing over the past few renewal cycles for utilities with California wildfire exposure, Erica Symonds, head of energy, Bermuda at Axa XL, said in emailed comments.
“However, we expect to see significant pricing increases in this space,” she said.
The capacity for California wildfire from traditional insurers will shrink “without a doubt,” she said in the emailed comments. “There will be carriers who will not be able to support wildfire at any pricing.”
While the market is challenging, Lockton’s Mr. McGoldrick said he was not aware of too many insurers leaving the market in its entirety.
“If you’re a utility, there are a few markets that are industry mutual insurers that write the bulk of the primary and first excess layers in casualty lines for utilities out there and those markets are very committed,” he said.
However, some insurers will be re-evaluating their exposures, and certain reinsurers may be looking to put exclusions or a moratorium on California wildfire risks as part of their reinsurance placement for utilities in excess liability layers and towers, Mr. McGoldrick said.
Looking ahead, experts agreed that insurance alone will not be adequate to address the rising wildfire risks faced by utilities operating in California.
“How do we mitigate the risk? It’s definitely going to be more of a proactive, all-hands-on-deck approach (from utilities and insurers and regulators) as to how we figure out ways to lessen the impact of these events,” said Mr. McGoldrick.
With hundreds of thousands of miles of power transmission lines and huge outlays of infrastructure into mountainous areas, utilities face overwhelming wildfire risks and they “can’t cut down enough trees,” Mr. Arita said.
One risk management response is to shift the burden to cities and residents to adopt more fireproof standards for infrastructure or buildings, he said. These municipal plans include improved vegetation management and reducing fuel around critical infrastructure and along highways, for example.
California is at the forefront of trying to deal with this issue, but all utilities will face expanding risks associated with increased climate change, Mr. Arita said.
“If it’s not a fire, next time it could be rising sea levels near San Francisco. These kinds of things are going to impact utilities more and more,” he said.
Robbie Hoyte, adviser for Canada-based insurance broker Valley First Credit Union, said that wildfire-related claims could spur local insurers to increase their rates, Richmond News reported. Mr. Hoyte called on businesses to review their coverage and buy insurance before a wildfire starts. Insurers are unwilling to offer coverage if there is an active forest fire located within 50 kilometers of the property, he added. The Insurance Bureau of Canada said that the 2016 wildfire disaster in Fort McMurray caused $3.7 billion Canada ($3 billion) in insured losses.