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California wildfire insured estimates rise as commercial losses mount

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Woolsey Fire in California

Estimates of the insured damage from the Camp and Woolsey fires now devastating California are nearing and could surpass the record $14 billion in losses from the 2017 fires, with some industry experts projecting substantial commercial insured losses this year.

The Camp Fire in Butte County, California, had burned 151,373 acres and was 70% contained as of Tuesday morning, according to the latest information from the California Department of Forestry and Fire Protection. It has destroyed 12,637 residences, 483 commercial and 3,718 other buildings and threatens another 14,500 structures, CalFire said.

The Woolsey Fire in Los Angeles and Ventura counties had burned 96,949 acres and was 96% contained as of Monday evening, Cal Fire said on its website. It has destroyed 1,500 structures and damaged another 341, according to the state agency.

On Monday, insured losses for the fires were pegged as high as $13 billion by catastrophe modeler Risk Management Solutions Inc. 

By comparison, insured losses for the 2017 California wildfires have been estimated at about $14 billion, making 2017 the costliest year for wildfire losses.

“At this point, it looks like it will be about the same or slightly higher than last year,” said Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore, which raised its damage estimate as the fires spread from “probably below the total losses caused by multiple October 2017 Northern California wildfires” to “likely match or slightly exceed the losses caused by multiple October 2017 Northern California wildfires.”

“The deterioration and limited controls suggest worse losses than we had originally thought,” Mr. Shields said.

While much of the damages will ultimately be residential, there have already been commercial losses as well, according to Ann Myhr, senior director of Knowledge Resources at The Institutes Risk and Insurance Knowledge Group in Malvern, Pennsylvania. For example, the Feather River Hospital in Paradise, California was destroyed in the Camp Fire.

“There are certainly small businesses, strip malls, hotels and other commercial structures that have been affected by these fires in both northern and southern California,” she told Business Insurance in an email.

Further, commercial insurers are not insulated from residential exposures.

“Both Chubb and AIG have a very significant share of the high net worth homeowners market,” Mr. Shields said, calling the business “a unique subsegment” of the homeowners market.

Losses in the segment “can be noticeable,” Mr. Shields said. “In both of these cases, it’s still a relatively small percentage of what they do in total, so the overall impact in the quarterly combined ratio will be moderated by the fact that they have vast amounts of commercial premium. So, it can cause an observable loss, but I don’t think it’s going to endanger their capital levels,” or be “disruptive” to the combined ratio.

Commercial losses could also be substantial, experts say.

“There will definitely be impact on the commercial side,” Chris Folkman, senior director of product management, models and data at RMS in Newark, California, said in an emailed response to questions.

As of now, more than 300 businesses have been destroyed in the Camp Fire, including a hospital and two grocery stores, Mr. Folkman said.

“Individual commercial claims can be very large due to inventory damage, business interruption and structure replacement costs,” he added.

In addition to loss of business income for commercial operations, which could be substantial depending on the amount of time required to rebuild damaged structures, costs could be exacerbated by requirements to rebuild structures according to current building codes, Ms. Myhr said.

“Once the structure is destroyed and needs to be rebuilt, the new codes will apply,” she said. “The increased constructions costs related to these changes would not be covered under most standard policies unless an increased cost of construction endorsement had been added to the policy.”

Smoke damage leading to evacuations and business closures is a less obvious loss exposure because a lot of the loss occurs outside the fire perimeter, Mr. Folkman said.

Meanwhile, potential liability and huge costs could be a problem for California utility PG&E Corp., which is now drawing greater attention, as suggested by recent reports from Debtwire and action by the California Public Utilities Commission.

On Nov. 15, Reuters reported on news from Bloomberg about a comment by a CPUC official on a call hosted by Bank of America Corp. that the agency does not want the utility to go into bankruptcy should it be found responsible for this month’s deadly wildfire in northern California. A CPUC spokesman said he could not confirm the remarks and Bank of America declined to comment, according to Reuters.

But the commission will soon issue rules related to legislation governing the recovery of wildfire losses, CPUC President Michael Picker said in a Nov. 15 statement.

S.B. 901, which was signed by California Gov. Jerry Brown in September, establishes mechanisms to address cost recovery for wildfire-related expenses, Mr. Picker said in the statement.

Public Utilities Code Section 451.2 “requires the CPUC, when evaluating an application for recovery of wildfire-related expenses, to consider a utilities’ financial status and determine the maximum amount the utility can pay without harming ratepayers or materially impacting its ability to provide adequate and safe service,” he said.

The commission will initiate a rule-making shortly to implement these code requirements by adopting a methodology for interpreting this provision that will be applied in subsequent applications for cost recovery, Mr. Picker said.

He also said he planned to look into “the corporate governance, structure and operation of PG&E, including in light of the recent wildfires, to determine the best path forward for Northern Californians to receive safe electrical and gas service in the future.”

The utility is already “facing potential losses/liability” from the latest fire in addition to those in 2017, Debtwire reported in a Nov. 15 note.

“PG&E this week has already been hit with multiple lawsuits related to the latest wildfire, which started in the Sierra Nevada foothills,” the note said. “For PG&E, the potential liability it faces from 2017 California wildfires was ballparked around $20 billion over the summer.”