Leveraging data to insure California's wildfire future

Marcus Winter

Hello and welcome to the third episode of Nothing Assumed in 2024 where we continue to talk on key topics that keep the reinsurance industry up at night. My name is Marcus Winter, and today it is my pleasure to welcome my colleagues Bonnie Guth and Jason Dunn. Bonnie is our head of government affairs here at Munich Re US, and Jason is one of our senior digital product managers. And together we will address the topic of how to leverage data to better understand the growing California wildfire risks.

Jason Dunn

Thanks, Marcus. Happy to be here.

Bonnie Guth

Thanks, Marcus. Glad I could join you both.

Marcus Winter

Jason, can you give us an overview of California's wildfire insurance market?

Jason Dunn

Absolutely, Marcus. So the 2024 California wildfire season is already proving to be a significant challenge. As of August 20th of this year, a total of 5,313 wildfires have burned over a cumulative 825,000 acres. Year to date, the number of wildfires and the number of acres burned are higher than the five-year average. Wildfires have destroyed over 1000 structures and claimed one life in the state. During late July, the total area burned during this wildfire season saw significant growth, partly due to the prolonged periods of warm dry weather.

These conditions allowed for several wildfires to grow rapidly in size, such as the park fire in Butte and Tehama counties, and the Borel fire in Sequoia National Forest. And we have yet to reach peak wildfire season. Typically, larger wildfires occur in late summer and fall as fuels have dried to a point where they burn more easily and California experiences strong winds. Additionally, following two wet years, California has experienced significant grass growth and this has resulted in a larger fuel load than we have seen in recent years. Finally, the wildfire season is growing longer. Historically, wildfires in California occurred between May and October, however recent data show us that due to rising temperatures and decreased rainfall, the season is beginning earlier and ending later, approaching a year round wildfire season.

Marcus Winter

That doesn't sound really promising. Where does that leave the homeowners in California? Can they still buy insurance coverage for their homes? And how are the insurance companies preparing for the upcoming wildfire season?

Jason Dunn

So the 2017-2018 wildfire season was a major turning point for insurance carriers and homeowners in California. Compared to the past, carriers have developed a new appreciation for wildfire risk in the days of including wildfire risk and policies without an additional cost are over. Many carriers have responded by pausing or restricting new business in the state, and they have also opted not to renew insurance for some homeowners. And as carriers limit their capacity and risk appetites, homeowners have been increasingly unable to obtain standard coverage and are being forced to turn to the state's insurer of last resort, the California FAIR Plan.

Those carriers that have remained in the market have invested in better underwriting pricing and exposure management tools. However, wildfire risk is not well covered by CAT models. And as a result, carriers have adapted by adopting stricter underwriting criteria, incorporating wildfire hazard risk scoring tools, increasing wildfire rates to better reflect risk and developing more sophisticated wildfire accumulation models. The analytics community has also responded by rapidly adopting the latest wildfire science, developing new data points and introducing new technologies such as satellite imagery to the desks of underwriters. And finally, communities have also taken action with increased awareness and efforts to fortify homes to make them less vulnerable to wildfire.

Marcus Winter

Bonnie, when you listen to what Jason tells us about the current state of the California wildfire insurance market, can you describe what the regulators are doing in California to address the current property insurance conditions?

Bonnie Guth

The California Department of Insurance is working to stabilize and strengthen the property insurance market in California by developing measures to implement the sustainable insurance strategy that CDI and the governor announced last fall. The measures are very much works in progress for now. Several proposed regulations have been released for stakeholder feedback throughout 2024. There's been a lot of discussion around them. These proposals include proposals that would allow insurers to use forward-looking catastrophe models and reinsurance costs in their rate making in exchange for commitments by the insurer to write more wildfire risks in areas that CDI identifies as distressed or under marketed. There also are proposals that we hope once they're finalized will be designed to better streamline the rate approval process. There are finalized changes that impact the FAIR Plan to allow insurers to recoup FAIR Plan assessments from policyholders, and they also revise commercial limits for FAIR Plan policies to address market conditions. We expect the stakeholder feedback and regulatory discussions to continue this fall.

Marcus Winter

When you say that the Californian regulators are developing a framework that would allow insurance companies to incorporate the forward-looking CAT models into their rate filings, can you expand a little bit on why this is a positive for the market?

Bonnie Guth

Allowing insurers to use forward-looking CAT models in their rate filing applications is a positive step for the California insurance market. This will reduce uncertainty in insurer pricing, which naturally can lead or start to lead to a more stable insurance market. The feedback from the insurance industry is ongoing.

Marcus Winter

Jason, at MRUS have been developing a range of analytical tools for our clients, and one of those tools tries to address market share analysis. And I understand we focused our efforts on California and also some surrounding states. Can you tell me more how the market and risk insight product that we have developed can help clients to assess their compliance with California's new wildfire regulation?

Jason Dunn

Yeah, absolutely, Marcus. At Munich Re US, we have developed analytical tools to help us understand market share and we have focused our initial efforts on California and the surrounding wildfire exposed states. Our marketing risk insights product can then help clients assess their compliance with California's proposed wildfire regulations. The Munich Re market and risk insights tool enables clients to understand their market share on a location count basis across various geospatial resolutions. We have built up a comprehensive US home market data set, which informs us about the number of standalone homes in any given area. The tool also includes our wildfire view of risk as informed by the Munich Re wildfire HD risk map for California. This is a high-resolution, wildfire risk layer that is globally proven and trusted to provide a greater understanding of wildfire risk. We are also excited for an updated version of this map to be released for California personal lines in just a few weeks.

We had been focused on building up our understanding of market share well before the CDI introduced their requirement. Clients often strive to manage their losses from large events in relation to their statewide market share. However, the standard approach of comparing a regionalized loss event to a statewide market share based on direct written premium is a very rough approach. Using our tool, clients can compare their share of a loss to their market share based on the number of locations for the same loss affected region. Additionally, they can identify peak pockets of market share before a loss occurs, reducing unexpected surprises. So when the CDI announced their market share threshold for wildfire distress zip codes, we were prepared to show clients their expected compliance with the regulation. We can also compare different portfolios and this will allow clients to see the impact of different portfolio strategies on their market share.

Marcus Winter

And indeed, all the market share analysis that I had seen in the past were always based on premium splits. What else makes our market share analysis unique?

Jason Dunn

So our market share analysis stands out in several ways. First, we have developed that comprehensive US market data set that enables clients to gain a deeper understanding of their market exposure. This data set allows us to create the market share analysis on the location basis, empowering clients to benchmark their portfolio against the market and pinpoint areas of peak risk.

Marcus Winter

And when you say location basis, that really goes down to the individual building?

Jason Dunn

That's correct. So we're talking about a location, meaning a standalone home against the market equivalent.

Marcus Winter

Cool.

Jason Dunn

Very cool. What also sets our analysis apart is the incorporation of our underwriting expertise and view of risk directly into the analysis. Wildfire risk remains a complex and not fully modeled phenomenon, making it essential for clients to consider multiple views of risk to avoid potential blind spots. Our tool provides a detailed distribution of wildfire risk across six classes, allowing clients to compare their portfolio's risk profile to the market at various resolutions. We then offer this analysis as a value-added service exclusively to our clients, providing them with direct access to our expertise and technology. This allows clients to benefit from our insights and data, ultimately enhancing their portfolio management and risk mitigation strategies. By leveraging our market share analysis, clients can make more informed decisions, optimize their portfolios and stay ahead of their competition.

Marcus Winter

And when you talk about wildfire risk classes, what would be examples of those risk classes?

Jason Dunn

That's a great question, Marcus. So we offer six classes and they are measurements of wildfire risk for a given location. They start with no or negligible wildfire risk and go all the way up to extreme wildfire risk.

Marcus Winter

In short, we would get a portfolio on a per building basis from our cedents?

Jason Dunn

Yes.

Marcus Winter

That's cool.

Jason Dunn (10:14):

Yeah, very cool. And clients have appreciated it.

Marcus Winter (10:16):

Bonnie, why are regulators focusing on a market share analysis to start with?

Bonnie Guth

The goal of CDI's sustainable insurance strategy is to create a more healthy and stable property insurance market in California. California's property insurance market suffers from insurers and capital leaving the state. Encouraging capital to stay in California or return to the California property insurance market is an important goal. One way to measure whether an insurer is deploying more capital in California is to focus on whether the insurer is increasing its market share or its exposure there.

Marcus Winter

And Jason, what has been the feedback from our clients regarding our new tools?

Jason Dunn

Feedback from clients on the market and risk insight tool has been overwhelmingly positive. The majority of clients who have been introduced to the tool have signed up for the service, and that indicates a strong demand for the valuable insights we can provide. Clients have also praised the tool's ability to deliver real-time market share on the location basis, enabling them to make more informed decisions, stay ahead of their competition. And our wildfire view of risk has been particularly well received as it does provide clients with a valuable check on their own portfolio strategy. Many clients have reported on covering new pockets of wildfire risks that they were not previously aware of, allowing them to take proactive steps to mitigate those risks.

Marcus Winter

And Bonnie, my understanding is that this is just the starting point for those market share analysis. The CDI could also potentially expand that to other risk areas, or is that only for wildfire?

Bonnie Guth

It's all part of the discussion right now. I think most the comments from the insurance industry seem to be that it is unrealistic to think that we're writing wildfire only CAT programs, so it would have to expand or it would be much harder to implement.

Marcus Winter

And Jason, why is it important for us as a reinsurer to offer these types of digital solutions to our cedents?

Jason Dunn

Marcus, it's essential that we offer these type of digital solutions to our clients for a variety of reasons. First, our digital solutions enable clients with new and innovative ways to benchmark their property portfolio against the market, allowing them to pinpoint areas where they may be over or underexposed. This information facilitates informed decisions to rebalance their portfolio and refine their underwriting strategy. By fostering transparency and a common understanding of portfolio exposure between risk partners, our digital solutions help facilitate smoother reinsurance renewals.

This in turn saves time and reduces the complexity associated with these critical conversations. By offering these digital solutions, we can also help clients make more informed decisions, optimize their portfolios, and navigate the reinsurance renewal process with greater ease and efficiency. Finally, we provide our digital solutions as a value add as part of our reinsurance relationship aiming to strengthen our partnerships and support the success of our clients. Our service is actually offered at no cost to our clients. By offering this service for free, we can help our clients navigate complex challenges and achieve their goals without incurring additional expense. By investing in our client's success, we're not only fostering long-term relationships, but also contributing to the growth and stability of the industry as a whole.

Marcus Winter

Thank you. And one final question that I asked all my guests. Bonnie, if you had a magic wand, what would you do?

Bonnie Guth

If I had a magic wand that I could use to address California insurance market issues, I would use it to make sure that everybody understood that insurers, reinsurers, property owners, policyholders, the California Department of Insurance, everyone's on the same page. We all know that California is an important state. We all want the property insurance market to return to the stable, healthy, competitive market that it can be. We'll get there, but if I had a magic wand, it could happen tomorrow.

Marcus Winter

And Jason, if you had a magic wand, what would you do to impact the Californian wildfire market?

Jason Dunn

It's an interesting question, Marcus, and similar to Bonnie, I would be very focused on ways that we could improve the overall market in California by making it easier to bring in new tools such as the market and risk insights tool, incorporating market share analysis, but also CAT models and other analytical tools that can allow the homeowners to more quickly achieve a stable market.

Marcus Winter

Bonnie and Jason, thank you very much for joining me today. I've learned a lot about California wildfire risks, and I like it that we already have specific solutions that help to address the problem for the insurers and their clients in California. We all believe that data analytics is the common grounding on which to create a path forward to ensure sustainable insurance market. And that is a prime example on how this all could work. Until the next episode, thank you very much. Bis bald und auf wiedersehen.