Los Angeles Wildfires Are Latest Example of Challenges Facing Actuaries, Insurers

By Ted Gotsch, Policy Content and Publications Manager 

Many eyes across the country are transfixed by the wildfires ravaging the greater Los Angeles area. While this is still an evolving situation, it is clear multiple fires have led to loss of life, as well as causing tens of billions of dollars in damage to homes and businesses. 

Sadly, this is not an unusual event. While wildfires are top of mind because of what is happening in L.A., the issue is one that touches the entire country. In recent years, property owners and insurance carriers across the Golden State and elsewhere have been decimated. In our public policy role and as integral experts that industry, regulators, and the public rely upon, the Academy has been vocal in discussing these challenges more broadly, as well as potential reforms that could be helpful. 

• Climate change’s effect on property insurance was the focus of a breakout session at Envision Tomorrow, the Academy’s 2024 annual meeting held in October. The session looked at the property insurance market in California and Florida, two states facing significant climate risk-related challenges.   
  
  It was noted that the growing prevalence of wildfires has increased property insurance rates in California. Rex Frazier, president of the Personal Insurance Federation of California, said the state ranked 20^th most expensive as of 2021. While the reform process had been slow, Frazier was encouraged by the recent introduction of a “Sustainable Insurance Strategy,” which allows insurers to use probabilistic modeling and factor in reinsurance costs as part of the rate filing process, as long as insurers agreed to increase their presence in so-called distressed areas. 
• The Academy’s Extreme Events and Property Lines Committee submitted comments to the California Department of Insurance (CDI) addressing its proposed catastrophe modeling regulation last April. The committee encouraged the CDI “to define the settings and assumptions used for modeling risks, as there could be impacts to the output—which could lead to an unbalanced marketplace.” 
• An issue paper on wildfires from the Academy identified and discussed key areas pertaining to wildfire risk and impacts on public. The paper, published in 2022, also discussed impacts to the insurers and reinsurers.   

• The role of actuaries in determining climate risk from wildfires and other extreme events was discussed in a September Actuarially Sound blog, written by my colleague Will Behnke. In it, he noted that insurance companies need to change with the times. 
  
  “As climate change continues to evolve, the insurance industry will need to remain agile and forward-thinking,” he wrote. “Embracing new technologies, refining risk models, and investing in resilience are key strategies for navigating the uncertain waters ahead.”
   
• A November/December 2023 Contingencies feature story, Extreme Outcomes, examines the rise in extreme events being fueled by climate change, including wildfires and hurricanes—events are occurring with unsettling frequency, and leading some insurers to reconsider their underwriting.

As we all hope that the fires are contained soon and that the communities affected are able to heal and rebuild, we recognize that public policy can have an impact on both a micro- and macro-level. For these reasons, the Academy will continue to work on behalf of the public and policymakers, to help educate and inform as they make decisions that directly impact the lives and well-being of our friends and neighbors.  

For more on the Academy’s work in this area, please view the Climate Risk webpage, as well as work done by the P/C Extreme Events and Property Lines Committee, and the Climate Change Joint Committee.