California Fires

As expected, now that the smoke has dispersed in the media’s eyes on the southern California wildfires themselves, attention now turns to the mysteries of Coverage A amounts on homeowners policies. As seen in the New York Times:

“I have about $1.5 million coverage for dwelling only,” Mr. Okonsky said, or the equivalent of about $230 per square foot of construction. “For custom-home construction I am getting prices like $350 up to $500 per square foot.”[...]

Guaranteed home-replacement policies have become increasingly rare in California since the 1990s, when a series of catastrophic earthquakes and wildfires sent insurers’ profits plummeting. Most California policies have limits on construction, although some include inflation riders or extension policies to create buffers beyond the estimated replacement price.[...]

Insurance industry officials say many homeowners contribute to the problem of insufficient coverage. In seeking to keep premiums low, the officials said, homeowners often do not inform their insurers about renovations, opt out of adequate coverage or fail to update their policies.[...]

But John Garamendi, the California lieutenant governor who served two terms as the state’s insurance commissioner, has placed much of the blame on the insurance companies. At a news conference earlier this year, Mr. Garamendi said that “lack of clarity in the language” of policies was a main reason that homeowners had insufficient insurance. He also said that, in some cases, insurance agents and insurance companies “were giving bad information to the consumers.”

There’s a reason why I asked my homeowners insurer to include a provision to automatically increase my Coverage A amount every year, in approximate proportion to the perceived increase in values and construction costs in my corner of the world. It’s not fun having an automagical guaranteed increase in the premium paid over/above pure trend…but it does help spare some of the pain that my wife and I would feel if disaster struck and we hadn’t had any increase to our limits.

I’m a little disappointed in the NYT’s subtle bias by not exploring the demise of guaranteed replacement cost provisions, which went away or were capped after a few years where the industry paid claims that were double or triple the policy limits, and folks who did keep their policy limits up-to-date ended up subsidizing the folks who had just let it ride.

But, after Katrina, the long-overdue acknowledgement that homeowners insurance shouldn’t be a loss-leader for the industry, and certain insurers seeing the light when it comes to the risk posed by aggregation of risk in certain areas…it’s perhaps understandable that a few of us are very sensitive to advocacy bias coming from the media and elected regulators.

Travelers grabbed headlines awhile back for promoting “greenness” by offering hybrid owners a 10% discount on their auto insurance. Interesting gimmick, true…but I think Fireman’s Fund may be trumping them in greenness. From Insurance Journal:

In response to the Southern California wildfires that burned in late October, Fireman’s Fund Insurance Co. is responding with an innovative green upgrade for affected policyholders. The company said it will rebuild its Prestige Premier policyholders’ homes that were damaged or destroyed “green,” if desired by policyholders.

The relevant item from the a bulletted list in the article/press release, as to what they mean:

Green building features include Energy Star-rated appliances and lighting fixtures, home insulation, heating/ventilating/air conditioning, low VOC (volatile organic compounds) paints, sealants, adhesives, low-emission carpeting, Federal Energy Management Program- designated plumbing fixtures featuring water conservation, and use of forest stewardship certified wood for cabinets, ceilings, siding and framing.

Of course, my inner cynic wonders if the building codes in the affected areas are such that green is effectively required as-it-is. If so…well, it’s still good advertising/promotion, I think.

Also included in the item is an offer to replace (up to the relevant sublimits) destroyed or damaged landscaping with fire-resistant landscaping…but that falls into the category of “good citizenship that will also reduce future losses.”

Seen in an AP story:

As wildfires were charging across Southern California, nearly two dozen water-dropping helicopters and two massive cargo planes sat idly by, grounded by government rules and bureaucracy. [...]

It took as long as a day for Navy, Marine and California National Guard helicopters to get clearance early this week, in part because state rules require all firefighting choppers to be accompanied by state forestry “fire spotters” who coordinate water or retardant drops. By the time those spotters arrived, the powerful Santa Ana winds stoking the fires had made it too dangerous to fly.

The National Guard’s C-130 cargo planes, among the most powerful aerial firefighting weapons, never were slated to help. The reason: They’ve yet to be outfitted with tanks needed to carry thousands of gallons of fire retardant, though that was promised four years ago.

With Ron Paul having garnered some measure of mainstream media attention, I’ve had some old discussions about libertarianism running through my head…in particular depictions of what an “ideal government” would look like.

I tend to fall somewhere in the libertarian range of the political spectrum due to my preference of seeing government interfere as little as possible in the “real lives” of individuals and their businesses. However, some extreme descriptions of “libertopia” - where government is as small as possible, and most things considered today to be governmental functions are privatized—smells dangerously close to anarchy when you start considering what exactly that means.

Such thoughts lead me to my belief that I don’t necessarily prefer small government. Instead, I prefer “invisible government”—that is, a government that either doesn’t impact my day-to-day life, or (for those functions best handled by government authority) it operates so smoothly and transparently that one doesn’t need to think about it.

Having tools that my tax dollars are helping to pay for sit unused due either to poor planning or due to excessive red tape (or at least red tape that can’t be waivered in a crisis) seems rather the opposite of governmental invisibility, doesn’t it?

With the Santa Ana winds easing and emergency workers finally starting to make a little bit of headway in their battle against the southern California wildfires, the media seems to be turning its attention towards the insurance matters ahead.

For example, Reuters is reporting:

Risk Management Solutions, which predicts and assesses insured damages, said in a statement that the wildfires which have devastated Southern California would likely cost insurers between $900 million and $1.6 billion.

“(But) if the wildfires continue to spread in this ongoing situation, losses are expected to reach or even exceed the higher end of this estimate,” Risk Management Solutions said.

Of course, don’t forget that that’s just an estimate of the insured losses, and wouldn’t include uninsured losses, deductibles, and the like.

An AP story (via Forbes) comments on the potential impact on homeowners insurance rates down the road:

With damage estimates climbing daily, reaching $1 billion Wednesday, homeowners fear that insurance companies will raise rates or even cancel policies in the wake of the fires.

State officials and consumer advocates say that’s not likely, but the scope of the fires and past tussles with insurers make many Californians skeptical.

Officials say they’ll be able to reign in rates, pointing out that insurance in California is highly regulated, and authorities aren’t likely to approve any increases in premiums, especially after pushing companies to reduce premiums this year.

Of course, changes to your homeowners insurance bill aren’t just impacted by your insurer’s base rates. Many carriers automagically increase Coverage A limits, attempting to replicate the inflationary pressures on replacement costs…which helps explain why the California homeowners insurance market seems so profitable. Coverage A amounts have risen with the real estate bubble, but the bubble itself has distorted the relationship between insured values and severity distributions on losses. Since many insurers are loath to revise their Coverage A rate relativities… I can easily imagine weird things going on in results.

However, Coverage A limits increases are likely to enter public consciousness for another reason. David Rossmiller at Insurance Coverage Blog writes (quoting a CNN story):

One of the biggest controversies erupted in 2003, when fires ravaged San Diego and San Bernardino counties. Consumers found themselves underinsured because their policy limits were not raised to reflect their home values, said Heller. That meant homeowners had to pay the difference.

“I think there is a question as to whether insurance companies learned from 2003 and have made sure that policyholders have enough coverage,” said Heller.

Interesting turn of the phrase there—did insurers make sure policyholders had enough insurance. Another way to say it: did policyholders learn from the 2003 fires and make sure they had enough coverage?

Seen at Business Insurance:

Catastrophe modeling company EQECAT on Wednesday estimated that insured losses from Southern California’s fires have now exceeded $1 billion.

The losses will continue to mount until the Santa Ana winds die down and firefighters can contain the fires, EQECAT said.

Judging by the television broadcast news folks getting a little tired of showing pictures of houses burning, and evacuated people and livestock in various fora, I expect in the next few days we’ll hear the pundits start talking more about the concept of megafires—fires aggravated by prolonged drought, and expanding development limiting resource management folks’ ability to tolerate limited burns in “off years”, leading to extra kindling being present when a fire does break out.

Oh, and if you haven’t already encountered it, KPBS is offering an impressive mashup with Google Maps showing the scope and status of the fires in/near San Diego County.

As seen from space:

You may have heard about the wave of wildfires that are threatening several communities in Southern California due in part to recent strength of the Santa Ana winds.

One comment I’ve heard in some of the coverage has caught my attention. From the International Herald Tribune:

In San Diego County as many as 10,000 homes were under evacuation orders, but authorities said many homeowners were refusing to leave. This forced firefighters to divert their attention to rescuing residents in danger of being engulfed in smoke and fire.

Firefighters are being blocked from their jobs because folks aren’t getting the heck away when ordered to by officials? Jeez!

Is it wrong that I’m left to wonder if California emergency officials could stand to take a lesson from Gulf Coast powers-that-be—if residents refuse to comply with a mandatory evacuation order, they’re on their own…other than being asked to wear toe-tags (dog tags, I guess, would be the fireproof equivalent) to identify them once the disaster has passed.