Tinderbox: California Wildfires and the Mortgage Meltdown

The wildfires that are sweeping Southern California are nothing new to the region, but the collapse of the housing market could add a unique twist for property/casualty insurers if large swaths homes become engulfed.

Insurers could have the unenviable task of dealing with claims on homes that lost significant value during the mortgage crisis, leaving underwriters and adjusters to sort out the resulting confusion

“There is a very fine line, especially in California, whether a home is overinsured or underinsured,” says Paul Anderson, consulting actuary with Millman in Milwaukee, Wisconsin. “Given the current economy, valuing the homes properly and accurately to determine the right amount of insurance has become much more difficult.”

A number of wildfires have spread across 122,000 acres of Southern California, according to published reports. The fires have been blamed for the death of two firefighters and the loss of approximately 50 homes.

Officials are hoping the fire spread could slow due to lower temperatures and higher humidity.

If a significant amount of homes are destroyed and losses reach catastrophic levels, insurance companies may find themselves having difficulties valuing the homes that are lost, Anderson says.

“The housing market has been in such a state of flux. Some prices have gone down as much as 30 to 40 percent in California,” Anderson explains. “Now they are just starting to come up.”

According to the latest statistics from the California Association of Realtors, while double digit price declines were the norm for the past two years home prices have rebounded. The statewide median price for an existing single-family home increased 3.9 percent from June to July of this year.

Anderson explains that while insurers often address pricing at time of renewal, insureds don’t always play close attention to coverage changes.

“The key to preventing confusion on a wildfire claim is to get proper pricing at time of renewal and communicating to the insured,” Anderson says. “They can try to make it as clear and obvious as possible, but ultimately up to the insured to understand their coverage.”

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