Property values and building replacement costs continue to skyrocket as the US economy improves, with residential, commercial and industrial property values growing faster than the GDP. In fact, a new report from Karen Clark & Co. reveals that insured property values increased 9% from 2012 to 2014.
Yet no state has seen its property value grow as quickly or reach such heights as California. Los Angeles County alone, with more than $1 trillion in property value, accounts for more than 3% of exposed property values in the country.
Orange and San Diego Counties are also among the top 10 US counties with the highest property values.
About 45% of estimated property value is residential, followed by industrial and agricultural (14%), personal and professional services (13%) and retail and wholesale property (11%).
That could be some cause for concern for insurance companies operating in the state. The report, “Increasing Concentrations of Property Values and Catastrophe Risk in the US,” notes that the majority of property value growth is concentrated in coastal areas and other regions more than usually exposed to natural catastrophe risk.
Researchers suggest that one implication of higher concentration of property value in these areas is the greater likelihood of a “mega-catastrophe loss” – a storm or earthquake near Los Angeles that the insurance industry may not be prepared to deal with.
“When a large magnitude event occurs in specific concentrated areas, the losses will be multiples of the PMLs (probably maximum losses) the insurance industry has been using to manage risk and rating agencies and regulators have been using to monitor solvency,” the report said.
“Insurers typically manage their potential catastrophe losses to the 100 year PMLs, but because of increasingly concentrated property values in several major metropolitan areas, the losses insurers will suffer from the 100 year event will greatly exceed their estimated 100 year PMLs.”
The paper says decries PMLs as giving a “false sense of security,” and instead suggests the industry use new metrics – called characteristic events – to monitor exposure concentrations.
“The CEs help companies better understand their catastrophe loss potential so they can avoid surprise solvency-impairing events,” KC & Co. said. “Because it’s likely that catastrophe loss potential will continue to grow in already concentrated areas, insurers require multiple perspectives on increasing catastrophe risks.”
