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By Niket Nishant and Manya Saini
(Reuters) - California's levy of $1 billion on private insurers to help pay out wildfire claims in its state-created safety net program has renewed focus on the challenges the industry faces in a market already losing appeal rapidly, analysts said.
Stringent regulations and recurring wildfires have driven some insurers away from the state in recent years, as companies scale back from risky geographies where frequent natural disasters are leading to billions in losses.
"The insurance regulatory environment in California is not very friendly to the industry and major changes will be needed if the state wants the private market to resume writing new business," analysts at Roth MKM said.
The devastating blaze that scorched entire neighborhoods in Los Angeles in January is expected to be the costliest wildfire in U.S. history for the insurance industry, with some expecting losses as high as $35 billion.
In addition, companies will now be required to contribute $1 billion to California's Fair Access to Insurance Requirements (FAIR) plan — also called the "insurer of last resort" — which offers coverage to those who cannot secure private insurance.
The industry has been battered by escalating losses in recent years due to severe weather events. Limited flexibility to adjust premiums also makes California a less attractive market for insurers.
As of September 2024, there were 451,799 FAIR Plan policies in force, up 41% from 2023.
"California remains one of the most resilient and forward-thinking insurance markets in the world," a spokesperson for the California Department of Insurance said.
"Insurance companies recognize the strength of California’s economy and its leadership in climate resilience and risk reduction."
RISING COSTS, SHRINKING COVERAGE
An insurer exodus could limit options for the 39 million residents in the state and put a further strain on their finances.
"Tales of California residents finding it ever more expensive to get insurance are legion, assuming they can get it at all," Russ Mould, investment director at AJ Bell, told Reuters.
Insurers will be permitted to charge a temporary fee to customers to pass on half the costs related to their FAIR bill.
"California property owners will ultimately be billed through their insurers to fund the FAIR Plan's assessment," said Michael Ashley Schulman, partner and CIO at Running Point Capital Advisors.
"This is a significant event for California insurers but also a bit of a relief because it seems to put a cap on what the state will ask from insurance companies, and they can now adjust their premium charges to account for this extra expense."
Industry bellwether Travelers and Zurich-based Chubb have estimated losses of roughly $1.7 billion and $1.5 billion, respectively, from the wildfires.
"It is going to be a big event for the industry," Travelers CEO Alan Schnitzer said in an earnings call last month, referring to the impact the wildfires will have on company balance sheets.
LA-based Mercury General currently expects catastrophe losses in the range of $1.6 billion to $2 billion while Allstate has forecast about $1.1 billion of losses, pre-tax, net of reinsurance.
Meanwhile, AIG - one of the world's largest commercial insurers - said it expects net losses to be roughly $500 million, before reinstatement premiums.
AIG CEO Peter Zaffino in a post-earnings call said the company had reduced its overall California exposure beginning in 2022. The retreat coupled with reinsurance has kept losses tied to the wildfires under check.
"I think that in California we just saw that, the modeling is flawed... some of these states set up vehicles that become a market of last resort, which sometimes become the market of only resort and then they end up taking on a lot of aggregate," Zaffino added.
Concerns over rising catastrophe losses have also weighed on investors, with the S&P 500 property and insurance index edging up just 0.2% this year, lagging the broader financial industry's 6.2% gain.
(Reporting by Manya Saini and Niket Nishant in Bengaluru; Editing by Krishna Chandra Eluri and Mohammed Safi Shamsi)
