Here’s what the California drought means for insurance professionals

The severe drought threatening the state could have profound implications for the property and agricultural insurance sectors.

Catastrophe & Flood

By

Long-term drought in California has caused Governor Jerry Brown to enact historic water control measures and has greatly changed the environment in which many residents and business owners operate. It has also shifted the risk profiles of property and agricultural insurance accounts.

A May report from the National Interagency Fire Center put much of California in extreme to exceptional drought conditions with “above normal” potential for wildfire. With stressed vegetation and high temperatures, the potential for wildfire has reached a peak that could cause $237.3 billion in property damages in high-risk areas.

The situation should prompt insurance agents to revisit coverage for personal and business clients. Of particular concern, says CoreLogic Senior Hazard Scientist Dr. Thomas Jeffrey, are new homes and businesses.

“New home construction in and around urban areas tends to occur on the outer edge of current development,” Jeffery said. “The fact that newly constructed homes are likely to be located in areas that would be in close proximity to wildfire risk is an important consideration for brokers and agents.”

He added that agents assessing quotes for homes and businesses in “urban” areas should check to see whether the buildings are near high fuel concentrations outside the urban or parcel boundary. If they are, this could affect policy premiums.

Coverage choices are also in play. At-risk home and business owners would do well to purchase additional policies that cover unique damages inflicted by flames.

John Putnam, a former insurance producer in Colorado Springs, Colorado – which experienced its own devastating wildfires in 2013 – says it is important to check for smoke and heat exclusions when selling commercial or private property coverage.

“Smoke claims are just a plain nightmare. Insurance companies are all over the place on it, and some carriers don’t cover it at all,” Putnam said. “Heat damage is another. They create a lot of angst when people call in to file claims.”

Of course, the current drought isn’t just affecting the property market. There are lessons for producers working with agribusiness clients as well.
David Graves, manager for the American Association of Crop Insurers, told Insurance Business the record-breaking drought has left many policyholders responsible for large portions of their losses because they opted for low levels of insurance coverage.

“There are large numbers of farmers in California who, when they do go buy insurance, buy a CAT policy,” Graves said. “Well, you’ve got to just about lose everything [to qualify for a payout], and it only pays for a very minimal percentage of your loss. It could be as small as 25%.”

Not that there isn’t a reason for that. CAT policies are generally much more affordable for farmers who grow thousands of acres of high-price crops like grapes or citrus, which trigger much higher premiums for yield or revenue protection coverage.

California farmers may have also foregone beefier crop insurance policies due to a low rate of loss incidents, Graves said.

“If your farm doesn’t have a history of frequent losses, then you’re willing to basically roll the dice and self-insure,” he pointed out, noting that California hasn’t experienced a drought of this severity since the 1976-1977 drought.

However, farmers may reassess their buying patterns in the wake of this drought, which is already estimated to cause up to $5bn in losses from farming and related businesses, according to the California Farm Water Coalition.

“When you get into these periods of drought, there aren’t many farmers that can withstand a significant loss several years in a row,” Graves said. “These kinds of weather systems provide at least ample food for thought for the decision makers about what kind of risk management plan they’re going to operate for their farming enterprise.”

Graves now sees crop insurance purchases in California heading in the direction Midwestern buying patterns did several years earlier.

CAT policies were once very popular in the Midwest, he noted, until major loss events from hailstorms and other catastrophes underlined the importance of more a robust risk management approach, which typically includes revenue protection coverage.

“In wheat country, farmers have just about graduated from buying only CAT coverage,” Graves said. “I expect that will be the case in California in a few years as well.”
 

Keep up with the latest news and events

Join our mailing list, it’s free!