PLUS panel: California homeowners market similar to Florida's five years ago

By Chris Munro

March 5 - (The Insurer) - California’s beleaguered homeowners’ market is similar to Florida’s five years ago amid expectations that more risk will enter the E&S market, while pricing in the property insurance sector is “one big storm away from going back into the abyss”, according to speakers at the PLUS D&O Symposium.

During a panel discussion focused on the broader state of the P&C market, Aon’s chief broking officer Brian Wanat said an unintended consequence of regulators in California not allowing carriers to get what he said is an adequate price for the risk they are assuming is “a lot of insurance companies just pick up and leave”.

“We have a ton of business now going through the excess and surplus channel where companies have freedom of form and rate,” said Wanat.

“So for those people and those companies that can afford to buy those non-admitted products, they're probably OK.

“But the rest are stuck with a state solution which is largely under insured and largely under reinsured,” Wanat added.

Berkshire Hathaway Specialty Insurance’s head of North America Sanjay Godhwani highlighted how the perceived threat of wildfire has shifted drastically over time.

If you asked a homeowners or commercial property underwriter in California 10 or 15 years ago what they were concerned about, “wildfire would not be the first thing they’d say”, he said.

Homeowners or commercial property underwriters would have cited convective storms in Texas or Oklahoma, or flood in Nashville, Godhwani suggested.

“Whatever price point you were getting in California, there was nothing there for wildfire risk,” Godhwani noted.

As the BHSI executive highlighted, one of the issues with the regulation in California is “the price point isn’t set to cover the loss”.

“Think about it: if you go back on the hurricanes the last 10 years, very few of those hurricanes were $50 billion.

“We just had a wildfire event that's as big as, or could potentially be as big as, some of the largest hurricane events we've had in the last 10 years.”

Another issue for underwriters is that because wildfire has not been top of mind, the tools they have to support them “are poor”.

“We’re at the point of being able to hazard grade California. I can tell you if it's high hazard or medium, but I can't tell you the frequency of an event (and) aggregation is complicated to understand.”

Godhwani noted that wildfire risk “is very location specific”.

“Literally, a geo-coded address matters as opposed to convective storm. You can regionally underwrite convective storm. You can’t with wildfire.

“We want to know proximity to fuels. Is there other vegetation around that can burn? We don’t have tools that strong at this point.”

There have been questions about whether the recent Southern California wildfires could result in some carriers going bankrupt, but Godhwani said he does not see that happening with the events that have arisen this year.

However, he said there are concerns with insurance regulation in California.

“The reality is that with regulation, with the fact that carriers can’t charge the right rate, it could lead to issues depending on the frequency of events as time goes on, which would be problematic.

“California is turning into what Florida was five years ago for residential risk. It’s going to be an issue,” he stated.

Looking at the property market more broadly, Wanat noted the sector has undergone 27 consecutive quarters of rate increases.

Godhwani said when it comes to property, rate adequacy currently “is good”.

“There's specific areas I can complain about, but as a general rule, starting in 2023 prices got to a point where they were in a good place,” he stated.

Aon’s Wanat agreed, and said “it's been pretty good for the last couple of years”.

“The insurance companies have been pretty adept at picking risk and managing their portfolios.

“But we like to say we're one big storm away from going back into the abyss when it comes to property pricing.

“We're in this market now, but things could change dramatically if there's a big whopper that hits in Florida or California or wherever.

“We can’t underestimate some of the issues around the secondary perils as well, whether it’s hail in western Texas…or some of the severe convective storms that have happened,” he said.”

“Weather definitely is changing somehow. I'm not smart enough to put my finger on it. (With) population increases there could be more building. Who knows? But you can't underestimate those secondary perils,” Wanat added.

Guy Carpenter managing director and head of financial lines Gina Pilla was also on the panel, and she highlighted how in 2024, 40% of the losses to hit the property market stemmed from severe convective storm.

“The fact that we don't necessarily have really good models today to look at that and understand how to price it can certainly be a problem.

“But I think in general when we think about the property cat market on the reinsurance side, it’s hugely important to the whole ecosystem,” she said.

“The property cat market is really critical to the reinsurance market, so the fact that we maybe have a bit of a blind spot on the secondary perils on the modelling side is concerning.”