Are homeowners underinsured for wildfire disasters?

Severe wildfires are putting pressure on both insurers and policyholders

Are homeowners underinsured for wildfire disasters?

Catastrophe & Flood

By Nicole Panteloucos

In recent years, the United States has experienced a dramatic surge in wildfires, elevating once-localized concerns to national crises. As these fires increase in frequency and intensity, they impose significant challenges on insurers and policyholders alike.

A recent study published in Nature, Ecology and Evolution reveals a troubling trend: extreme wildfire events have doubled in frequency and magnitude over the past two decades.

Despite it being early in the summer season, over 20,000 wildfires have already ravaged more than two million acres across the United States this year.

“When we start to see these repeated events, it puts a lot of financial pressure on insurers,” emphasized Robbie Arnold (pictured above), managing director at Charles Taylor.

Inflation and the risk of underinsurance

Given the escalating frequency of wildfires, the skyrocketing costs of real estate and construction materials have raised concerns about whether wildfire insurance policies can keep pace with inflationary trends.

“Three per cent (3%) inflation is common, so moving up a little bit over time is not a big deal. But now we’re taking much bigger jumps; we’re seeing 7% or 10% inflation,” observed Arnold.

Are policyholders adequately covered when wildfires necessitate home reconstruction?

Likely not. When inflation moves rapidly, it can become increasing difficult for insurers to quantify damages.

As the cost of equipment and raw materials for construction rise, insurers can no longer say, “We’ve suffered a loss at x amount and move on,” noted Arnold.

Often, by the time insurers get their hands on materials to do repairs, their cost has already gone up.

Describing how this effects the wider industry, Arnold said: “Claims don’t close down quickly; they are open longer and it’s a more expensive process.”

Recent statistics indicate a troubling trend within underinsurance.

According to a spokesperson from the Insurance Information Institute, two-thirds of American homeowners are underinsured for wildfires by as much as 60%, imperiling their ability to recover in the event of a disaster.

With one in six Americans living in areas with significant wildfire risk, this discrepancy could lead to serious financial consequences, with potential gaps in coverage becoming more pronounced as inflation continues to outpace policy adjustments.

Buy down policies and rising deductables

Insurers need to continuously update their cost estimates to reflect inflation and market conditions to avoid leaving policyholders vulnerable to insurance penalties and other financial pitfalls.

“Because wildfires are becoming more frequent, I do feel that policies are starting to open. We’re treating these as the catastrophic events they are,” stated Arnold.

“There are products that are being evolved to help consumers. They can buy standard policies that provide catastrophic coverage and buy deductible buy down policies that can reduce their out-of-pocket expenses,” he continued.

Buy down options may be increasingly appealing as insurers raise deductibles on wildfire policies to manage risks more effectively. While higher deductables enhance predictability for insurers, Arnold acknowledged this “puts pressure on policyholders.”

Consumers with higher deductibles often pay more out-of-pocket before insurance coverage kicks in. This can strain their finances, especially during unexpected natural catastrophe risks.

“We are in an environment where policyholders may be left in the dust because they are getting hit with losses that are technically repairable, but they don’t have enough coverage as insurers grapple with pricing trends,” said Arnold.

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