California Wildfires: Rising Costs and Impact on Insurance Tracking

Wildfires continue to devastate California, claiming over 25 lives and burning more than 40,000 acres in the Los Angeles area. In addition to the destruction caused by the fires, L.A. County Sheriff Robert Luna announced on Thursday, January 9th, that 20 people were arrested for looting.

As the fires destroy more property and lives, the question of insurance becomes increasingly urgent. JP Morgan estimates that insured losses from the two wildfires could exceed $20 billion. This is not the first time catastrophic fires have ravaged California, and it will not be the last. Consequently, many of the largest U.S. primary insurers had already begun withdrawing from the region, as claims ratios have become unsustainable.

Meanwhile, more of California’s population finds itself in harm’s way. According to The Proceedings of the National Academy of Sciences (PNAS), a peer-reviewed journal of the National Academy of Sciences (NAS), 25 million people moved into wildland-urban interface (WUI) areas between 1990 and 2010. WUI zones are highly vulnerable to wildfires due to their mix of open spaces, parks, and residential housing.

The question on everyone’s mind is: what does this mean for the future? For now, California Insurance Commissioner Ricardo Lara has invoked a moratorium to suspend all policy non-renewals and cancellations by insurance companies for one year. He also directed insurers to halt any pending non-renewals and cancellations issued before the fires began. On the surface, this appears to be a practical solution. However, following large payouts, insurance providers are likely to significantly increase renewal premiums for homeowners in California.

Rising insurance costs have already become a major issue, leading to two problematic trends. Homeowners with no mortgage obligations are increasingly opting out of paying for insurance, while those with active mortgages are struggling to find affordable coverage. As premiums rise and insurers pull out of high-risk areas, more mortgage notification letters regarding lapses in insurance are expected.

In this challenging environment, it is more critical than ever for lenders to work with service providers who align with their goals for insurance tracking and compliance. This means partnering with providers that prioritize collaboration between lenders and homeowners to:

• ensure proper notification is given to borrowers about missing insurance, as required by regulations;
• help mortgagees obtain up-to-date insurance coverage; and,
• use lender-placed insurance as a last resort.

With this approach, lenders can reduce borrower impact while mitigating risk and staying compliant. (See our blog post, Navigating Risk: Insurance Tracking Made Easy)

With over 30 years of experience in helping lenders navigate the complexities of mortgage servicing, AFR Services has the expertise to guide your insurance tracking processes toward smoother outcomes. Learn more about how AFR Services can help you manage wildfire risk with our comprehensive suite of servicing solutions, including insurance tracking.