Page 7 - Business Sense 11.1 (Virosha Pillay)- eBook

ARE WE HEADING TOWARDS AN
UNINSURABLE MARKET?
IMPACT OF THE LA WILDFIRES ON THE INSURANCE INDUSTRY
Richard Hoal
Rona Evans
Kajal Mulchandani
Richard Hoal, partner; Rona Evans,
partner and Kajal Mulchandani,
candidate attorney, Cox Yeats to go on risk or will only do so
ecent news headlines
have been consumed by
Rthe series of wildfires
devastating Los Angeles,
particularly the affluent areas of
Pacific Palisades, Eaton, Hurst,
Lidia, and Sunset.
In addition to claiming a To illustrate, prior to the 2025 $377 million available to pay Important Takeaways
number of celebrity homes, the wildfires, property owners in claims, compounding concerns As the insurance industry adjusts
fires have caused widespread the Pacific Palisades (one of the that even a single wildfire to market trends and an evolving
devastation to over 40,000 acres neighbourhoods that has been could destabilise the program risk landscape, it is important
of land, as well as resulted in the the most severely impacted) were and leave property owners that policyholders understand
loss of lives and displacement already experiencing difficulty in uninsured for the fire damage. the nature and extent of their
of more than 150,000 residents. finding insurers with an appetite Accordingly, the FAIR plan cover, both at the inception of
More than 12,000 structures to underwrite fire coverage, as could be faced with a similar their policy and at subsequent
have been destroyed, including thousands of policies were either scenario to that faced by South renewals, where exclusions and
residential properties, commercial cancelled or not renewed due to Africa’s special risk insurer, restrictive conditions may be
buildings and outbuildings. The the area’s exposure to the fire- Sasria SOC Limited, following introduced by insurers (typically
result is damage estimated to prone Santa Monica Mountains the 2021 looting and riots, where as a result of pressure from
be in the unprecedented region and the high value of the homes government had to intervene to reinsurers). Questions on coverage
of $135 billion to $150 billion. situated in the area. ensure Sasria’s solvency. and policy conditions should be
Although some properties As a consequence, it was no discussed with the broker. It is
escaped structural damage, longer commercially viable for What does this mean for also important to understand the
property owners are still expected insurers to underwrite this risk, South Africa? Unaffordable vs limits of indemnity and any policy
to face considerable losses due to and cover was either unavailable Unavailable Cover exclusions or conditions for cover.
smoke-related damage. or sold at exceptionally high The issue of damage caused by Although insurance is often
Although the assumption premiums so as to essentially wildfires extends beyond Los considered to be a “grudge
may be that insurance cover for transfer some of the risks to the Angeles – in the South African purchase” it is important that
property damage of this nature insureds. context, one of the most notable policyholders ensure they have
is readily available in the market, State Farm, a leading property incidents of fire damage was adequate cover, specifically in
and that the homeowners who and casualty insurer in the U.S., caused by the 2017 Knysna the wake of increasing premiums
lost their properties will be notably discontinued coverage for fires. These wildfires resulted in where the reaction is typically
covered by insurers, that is not almost 70% of the policyholders indemnified losses in excess of R2 to try and reduce premiums
necessarily the case. within the region of the Pacific billion, however the result was a by lowering sums insured and
Palisades in July 2024. The steep increase in premiums in the limiting the scope of cover. The
Impact of the occurrence of company decided to stop offering following year. effect of under-insurance (due
wildfires on the insurance new policies and refused to renew to an inadequate declared value)
This is, in part, due to global
industry existing ones, leaving many risk-sharing mechanisms is that insurers could be entitled
There is an undeniable upward vulnerable homeowners with no involving both local insurers and to apply average depending on
trend in the occurrence of natural choice but to turn to the California reinsurers. A consequence of the policy terms. Essentially, this
disasters worldwide, as a result of Fair Access to Insurance these risk-sharing mechanisms means that insurers would only
climate change. This has a material Requirements (“FAIR Plan”). is that escalating losses from need to provide indemnity for a
impact on the global insurance The FAIR Plan is a state- events such as the LA wildfires percentage of the loss, resulting
industry, and the available cover managed programme of last resort have a ripple effect and may in the insured only being paid out
in the market – the result is a for California homeowners, which result in higher reinsurance partially for the loss suffered.
corresponding downward trend in provides basic fire insurance premiums and stricter terms for Practically, an insured should
policies providing indemnity for coverage in high-risk areas where local insurers. The increase in always insure their property
climate-related risks. traditional companies won’t. reinsurance premiums ultimately at replacement value and not
In “high-risk” areas such as Securing coverage through drives up costs for policyholders, market value at the time to ensure
the FAIR Plan comes at a high specifically for high-risk policies.
Los Angeles, many homeowners adequate coverage. 
seeking coverage against wildfires premium for many homeowners, If this trend continues
are increasingly confronted with and the premiums are only (whether it be due to an increased Should you require advice or assistance,
expected to increase.
insurers who are either reluctant risk of fires, floods, or other please contact
Coverage in terms of the FAIR natural disasters), the risk is T: +27 (0)31 536 8500
subject to exceptionally high Plan is limited to $3 million that insurance may become E: rhoal@coxyeats.co.za
premiums. This creates what in damage protection for unaffordable, or even unavailable. revans@coxyeats.co.za
has been referred to as a “dual residential properties, despite An example of a scenario where kmulchandani@coxyeats.co.za
challenge” with wildfire insurance: the value of these properties cover for high-risk perils becomes W: www.coxyeats.co.za
the increase in insurance often significantly exceeding unavailable is seen in the context
premiums and the growing this limit. Nevertheless, as at of grid exclusions imposed in the
number of non-renewals for January 2025, the FAIR plan South African market following
policies in high-risk areas. was estimated to have only pressure by reinsurers.
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