The Recent Los Angeles Fires: A Crisis Beyond the Flames.

The recent wildfires in Los Angeles have left a trail of destruction, engulfing thousands of acres, displacing families, and reducing neighbourhoods to ashes. As South Africans, we are taken back to the tragic Knysna fires of 2017. The flames that took the lives of seven people, consumed over 1,000 homes, displaced thousands of families, and left more than 15,000 hectares of land in ashes, with damages exceeding R4 billion.

Amidst the devastation in Los Angeles, a new crisis has emerged: the decision by major insurance companies to cancel fire coverage in high-risk areas. This controversial move has raised concerns about the future of disaster recovery, financial resilience, and equitable access to essential insurance services.

The Role of Insurance: Balancing Public and Private Roles

Insurance plays a pivotal role in disaster recovery, providing homeowners with financial support to rebuild and recover. From a public perspective, widespread access to insurance fosters resilience, stabilizing communities in the wake of disasters. However, for private insurers, ensuring profitability while managing escalating risks in fire-prone areas creates a tension between the public good and business sustainability. “In dire times, insurance brokers must stand firmly, offering clients their unwavering support while safeguarding the stability of carrier partners” – Simba Makwembere, Managing Director at Maksure Risk Solutions.

Why Insurers Cancel Coverage

Drivers of Coverage Cancellations

  1. Increased Fire Frequency and Intensity
    • Climate change has intensified the wildfire season, leading to larger, more destructive fires. This translates to more claims, higher payouts, and reduced profitability for insurers.
  2. Escalating Costs and Declining Margins
    • The cumulative financial toll of wildfires in California has led to skyrocketing costs. Insurers, constrained by regulatory limits on premium increases, often find it unviable to continue offering coverage in high-risk zones.
  3. Reinsurance Market Pressures
    • Insurers rely on reinsurance to mitigate their own risks. With reinsurers raising their rates or withdrawing from fire-prone areas, primary insurers face additional financial stress.
  4. Regulatory Frameworks
    • State regulations that limit premium adjustments hinder insurers from adequately pricing policies to reflect the true risk, leading to market exits.

Precedents in Other Regions

Similar trends have been observed in Utah and Australia’s bushfire-affected zones, where insurers withdrew or significantly increased premiums, forcing governments to step in with alternative solutions.

Implications for Homeowners and the Economy

Impact on Homeowners

The immediate effect of cancelled fire policies is devastating for homeowners, leaving them financially exposed. Without access to affordable coverage, many families face the prospect of losing everything should disaster strike again.

Broader Economic Risks

Uninsured properties pose a long-term risk to local economies, reducing property values and destabilizing communities. Additionally, the strain on state resources increases as uninsured losses often shift the financial burden to public disaster relief programs.

Exploring Alternatives

Potential solutions include state-sponsored insurance pools, subsidies for homeowners in high-risk areas, and incentives for adopting fire-resistant building practices.

How The Situation In Los Angeles Might Influence the African Insurance Landscape

  1. Global Reinsurance Market and Rising Costs
  • Reinsurance Companies: Many global reinsurers, who help local insurers manage large-scale risks, operate on a global scale. The catastrophic losses from major wildfires in California could lead to increased claims payouts, which may drive up costs for reinsurers.
  • Higher Reinsurance Premiums: If reinsurers face higher costs due to the California wildfires, they may raise premiums for African insurers as well. African insurers often rely on international reinsurers, especially for high-risk events like natural disasters, which could make insurance more expensive for African consumers and businesses.
  1. Risk of Escalating Insurance Exclusions
  • Stricter Exclusions: Just as insurers in California may begin to exclude fire coverage or hike premiums for high-risk properties, African insurers could follow suit in markets where wildfire or climate-related disasters become more common. This could lead to reduced access to insurance for high-risk properties unless appropriate mitigation steps are taken.
  1. Impact on Insurance Product Offerings
  • New Products for Climate Risks: In response to growing concerns over natural disasters, including wildfires, African insurers may begin developing new insurance products to cover emerging climate risks. These could include wildfire-specific policies or bundled packages that cover a wider range of natural hazards.
  • Changes in Policy Terms: African insurers may revise their policy terms, adjusting coverage limits and exclusions, particularly in regions of Africa where there are increasing risks from wildfires, droughts, or other environmental disasters.
  1. Foreign Investment and Global Economic Impact
  • Financial Strain on Insurers: Significant losses in California could affect the financial stability of some international insurance companies, potentially leading to tighter capital reserves or reduced investments. If global insurers face losses in one region (like California), they might scale back operations or reduce their exposure in other regions, including Africa.
  • Foreign Capital Flow: On the flip side, large-scale losses in global markets could create opportunities for alternative insurers or reinsurers (e.g., from the Middle East or China) to enter the African market, offering new competition or potentially lowering prices.

Policy Responses and Industry Perspectives

Legislative Efforts

California has responded with measures such as the FAIR Plan, a state-mandated program offering basic fire coverage to high-risk homeowners. However, these plans are often more expensive and less comprehensive than private insurance.

Insurer Strategies

Insurers are exploring enhanced risk modelling using advanced technologies like AI and satellite data to better assess and price risks. Some are also incentivizing fire-resistant construction and defensible space practices to reduce vulnerabilities.

Public-Private Partnerships

Collaborative efforts between governments and insurers, such as subsidizing premiums or investing in community fire mitigation programs, could offer a balanced approach to managing risks while ensuring coverage availability.

The Los Angeles fires highlight a pressing need for balanced solutions that address the growing risks of climate change while ensuring the financial sustainability of insurance systems. Public-private partnerships, innovative risk management, and supportive legislation are critical to protecting communities and preserving access to essential coverage. As climate challenges intensify, society must rethink risk management and develop adaptive strategies to safeguard both people and economies against the uncertainties ahead.

“While the fires in Los Angeles are geographically distant from Africa, their impact on global insurance markets, particularly the reinsurance sector, could influence pricing, availability, and product offerings in Africa. The growing awareness of climate change and its effects may encourage African insurers to better prepare for similar challenges, leading to changes in the insurance landscape across the continent”; – concludes Malven Chibaya Technical Broker at Maksure Risk Solutions.

At Maksure Risk Solutions, as an Afro-Global independent specialist insurance and reinsurance broker with access into the Lloyd’s market, we specialize in providing comprehensive insurance broking services that cater to the diverse needs of the corporate landscape. Our tailored insurance solutions help businesses proactively secure their assets, ensuring financial stability and operational continuity.

For more information: info@maksure.co.za

Tel: 011 805 0086

Web: www.maksure.co.za

About Maksure Risk Solutions

Maksure Risk Solutions is an Afro-Global independent specialist insurance and reinsurance broker with business footprint in Africa, Asia, East & Western Europe, South America and the Caribbean. We provide innovative and tailor-made risk solutions in Insurance and Reinsurance as well as Risk Financing and Actuarial Consulting geared towards capital management and strengthening our client’s balance sheet. Maksure is also one of the major players in Captive Management (Establishment & Management) in South Africa, Mauritius, Bermuda and various other jurisdictions. We have access into the Lloyds of London with a deep understanding of African markets. Our global nature ensures that our clients access quality capacity as well as some of the world’s latest thinking and solutions.