The biggest wildfire in U.S. insurance history will neither undermine insurance ratings nor prompt a pricing surge in homeowners’ coverage in the state, according to the most recent research by Standard & Poor’s Rating Services.
“We’re not looking at any ratings consequence,” said Standard & Poor’s credit analyst Polina Chernyak. Seven insurance groups face virtually all of the exposure. The six rated by Standard & Poor’s–Allstate, Farmers, Nationwide, SAFECO, State Farm, and USAA–are all national players and therefore are insulated against a concentration of risk from a single state.
Total loss estimates for the fires that swept southern California in late October and early November in 2003 come to about $2.5 billion, which, for the group of largest insurers, equates to three or four percentage points of premium income for third-quarter 2003.
Measured in these terms, the impact is “pretty much a repeat of the Oakland fire of 1991,” commented Standard & Poor’s credit analyst Alan Koerber. About 3,600 homes were destroyed in the flames, compared with slightly less than 3,000 homes in 1991. Accordingly, insurer payouts for the event exceed the $1.7 billion price tag of 1991 (equivalent to $2.2 billion in 2003 prices). Unlike the Oakland fire, however, this one is unlikely to cause prices to flare up. “Since 1991, insurers have built wildfire risk into pricing, so there should not be a discernible pricing effect this time,” said Ms. Chernyak.
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