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Listener Alex Duerre of Anchorage, Alaska, asks:
What impact will the Los Angeles fires have on American insurance companies? Given 2024’s Hurricanes Helene and Milton, when do insurance companies fail to pay insurance claims during many natural disasters in America? Could insurance companies go bankrupt?
Catastrophic Los Angeles fires destroyed at least 12,000 housing unitsschools and other structures since their start at the beginning of the month. Insured losses could reach up to $20 billion.
Most of the insurance companies we have today were created in “peacetime,” that is, when the consequences of climate change were not visible, said science professor Daniel Aldrich. politics and public policy at Northeastern University. But over the past century, the number of natural hazards and their magnitude have increased due to climate change, Aldrich said.
Insurance companies now face an increasingly changing landscape. But insurance companies are unlikely to go bankrupt because the insurance industry is well capitalized and the insurance companies themselves have their own insurance, called reinsurance.
Don Griffin, a property and casualty adjuster with the American Property Casualty Insurers Association, said he thinks insurers will be able to pay for everything. Los Angeles wildfire claims.
There are limits to how much people will be able to receive, but insurers “exist to give them every penny they’re entitled to,” Griffin said.
To ensure it has enough money to pay claims, the industry has a surplus, which stood at a cumulative total of $1 trillion at the end of June of the year last, Griffin said.
“Every insurer in the United States is required to have a surplus,” Griffin said. And they must prove they have sufficient surplus for the state or states in which they do business, Griffin explained.
“It’s basically a savings account that can be used for almost any type of loss the business needs to pay for,” Griffin said.
Insurance companies are also subject to a series of checks and balances: State insurance regulators review their finances, and rating agencies will quickly warn them if they are not doing well, Griffin said.
And once insurance losses exceed a certain amount, reinsurance kicks in, Griffin said.
The insurance company pays the reinsurer a portion of its premiums, just like a homeowner would for their policy, Griffin said.
If insurance companies don’t feel they can adequately cover homeowners’ claims, they will leave a state. But it’s a failure in the sense that it’s a market failure, Aldrich said.
In California, the big insurers left because They faced climate change-induced disasters and limits on the amount of premiums they could set, said Benjamin Keys, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. in a recent interview with Marketplace.
Following the Los Angeles wildfires, homeowners in the state can expect premiums to increase.
As part of a series of recent regulatory reforms ahead of the wildfires, insurers will be allowed to include reinsurance rates in the rates they charge homeowners, said Kenneth Klein, a professor at the California Western School of Law . The amount that insurance companies pay to reinsurers represents “a very significant cost line” and the amount that reinsurers can charge is not regulated, Klein said.
Insurers in the state also will be allowed to raise premiums based on catastrophe modeling algorithms, Klein said.
Many states provide equitable access to insurance plansthat provide people with insurance if they do not have access to a regular plan. But in California, the FAIR plan did not have $377 million available to pay claims and $5.75 billion in reinsurance last week.
“FAIR plans were designed as a band-aid in the insurance market, and in recent years they have expanded well beyond their original intended use,” Keys said. “I think the question will be whether this system is capable of handling a shock as large as this.”
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