Insured Losses from Wildfires in Hawaii

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Catastrophe modeling firm Karen Clark & Co. has estimated that insured property losses from the recent wildfire in Lahaina, Hawaii, amount to approximately $3.2 billion.

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Impact on Homeowners

While the property and casualty insurance industry can easily cover these losses, industry experts warn that homeowners across the country may face the consequences. Insurers are likely to raise premiums to compensate for ongoing losses from wildfires and other extreme-weather events, such as thunderstorms.

Minimal Impact on Insurers

Despite the significant insured losses, analysts affirm that the insurance companies writing this type of coverage have the financial capacity to absorb them without major disruptions.

Meyer Shields, an analyst at Keefe, Bruyette & Woods, says, “This loss is not sizable relative to the entire industry’s capitalization. These insurance companies can absorb it and continue operating. However, they will likely raise rates in response to this loss, as our memory of it is still fresh and unexpected.”

Primary Insurers Bear the Brunt

The primary insurance companies, rather than reinsurance companies that serve as insurers for insurance companies, will bear the majority of the losses. Consequently, premiums are expected to rise.

Shields adds, “Rising premiums are a reflection of the increasing potential losses that these companies anticipate in the coming years. The memory of this recent loss will impact rates as far ahead as 2024-2025.”

Strong Capitalization of the Industry

Overall, the insurance industry is well-capitalized and adequately equipped to handle such catastrophic events. According to the Insurance Information Institute, the U.S. property and casualty industry had $980 billion in capital by the end of 2022.

Janet Ruiz from the institute assures that the insurance market in Hawaii remains stable and that insurance companies are prepared to handle catastrophes. She mentions that the industry has successfully dealt with wildfires and hurricanes in other states, demonstrating its ability to navigate these challenges.

In summary, while the insured losses from the devastating wildfire in Hawaii are significant, the insurance industry’s financial strength and preparedness provide reassurance that homeowners’ claims will be met. However, homeowners nationwide may experience an increase in premiums due to insurers adjusting rates to accommodate future potential losses from similar events.

Rising Costs and Restrictive Coverage for U.S. Insurers

The recent Lahaina wildfire in the United States has further intensified the already significant losses faced by insurers this year. Insurers have been grappling with higher-than-anticipated catastrophe losses due to severe convective storms. These storms encompass a range of elements such as thunder, lightning, heavy rain, hail, strong winds, and abrupt temperature changes.

One reinsurance broker, Gallagher Re, estimates that insured losses from these storms have already reached a staggering $34 billion as of mid-July. This figure may increase further, surpassing the record set in 2011 and making 2023 the costliest first half of the year in terms of thunderstorm-related insured losses.

To address these mounting losses from catastrophic events, insurance companies have started implementing measures to mitigate risks. They are raising rates, adjusting premiums, and scaling back coverage in high-risk areas by reducing the number of policies they underwrite. This upward pressure on premiums is expected to persist for the foreseeable future. In fact, the average cost of homeowners’ insurance in the U.S. currently stands at $1,700, a 10% increase compared to last year.

Experts in the industry, such as Adam Klauber, an analyst at William Blair, predict that insurers will continue to limit coverage in regions prone to wildfires. Farmers Insurance, for instance, recently announced that it would restrict sales of homeowners’ policies in Florida and California – two states susceptible to hurricanes and wildfires. State Farm and Allstate have also withdrawn from offering new home-insurance policies in California.

In light of the recent Lahaina wildfires, Klauber anticipates a trend of increased geographic restrictions and policy non-renewals. As a result, more consumers will likely have to turn to the excess and surplus market for coverage. However, this alternative market is typically less regulated and comes with higher costs.

The challenges facing insurers in the United States are substantial, and their impact on coverage and pricing is expected to persist. Insurance companies continue to grapple with mounting losses and are adopting measures to safeguard their businesses. As a result, both homeowners and insurers must prepare for the evolving landscape of insurance coverage and costs.

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