What California's Wildfires Mean for Your Insurance Premiums

Pedro Ponce | Apr 1, 2021 | minute read

For California residents, wildfires have switched from rare occurrences to an ever-present threat. In fact, 2018 saw the worst wildfires in the state’s history, and countless Californians are still recovering. If you’re among those wondering whether a fire could reach your home or business, you’re not alone.

To protect your home and business, you’ve likely started thinking about getting insurance. But how have the fires already affected those insurance rates?

Less visible than the charred grounds and devastated homes are the effects that these fires have had on the insurance industry. In the wake of the California fires, many insurance companies have gone out of business, while others are upping their premiums.

How Insurance Companies Set Their Prices

Insurance companies are for-profit businesses that make money when they earn more on insurance premiums than they have to pay out in claims. The cost of the premiums they charge is carefully calculated to offset the liability they’re taking on by extending coverage to an individual, property, or business. So the riskier it is for the insurance company to extend that coverage, the higher the premium. In essence, insurance companies are taking a carefully-assessed gamble. 

To place their bet, the insurer will take a look at numerous variables and, based on what they see, they determine how great the odds are in their favor. The better their odds of not having to pay out on a given policy, the less the premium will be.

Most likely, this is something you’ve already observed. For example, as you get older, you become a more experienced driver, and your car insurance premiums drop; but if you get into too many accidents, they increase.

Insurance companies look at these same risk factors when they go to insure property in areas prone to natural disasters. As certain risks become more common—like devastating fires—the insurance companies will increase their premiums in accordance with that risk.

The Impact on Insurance Premiums for Those in Fire-Prone Areas

Insurance companies utilize risk maps to determine how risky a given area is to insure. They can keep different maps based on types of risk, as well as what forms of insurance coverage they impact. For example, risk maps showing areas with dangerous roads that are prone to accidents might result in higher car insurance and health insurance premiums, but wouldn’t impact property insurance.

Once an area experiences a natural disaster, insurance companies have the right to redraw their risk maps and mark that area as being a greater liability. While this rarely happens directly in the wake of a fire or other event, most companies will reevaluate risk on a set cycle of every five to ten years.

Those fire-prone areas, however, will likely see a premium jump even sooner. Anytime you file a claim on an insurance policy, there’s a strong chance that the premiums for the next coverage cycle will go up. As a result, many who were affected by the California wildfires and filed a claim are likely already paying more for their insurance policies.

The Impact on Insurance Premiums for Those Not in Fire-Prone Areas

Unfortunately, even if you aren’t located in an area impacted by the wildfires, your insurance company could still increase your premiums due to the California fires. The insurance companies could choose to do this throughout the state or even nationwide. Luckily, they can’t do this at random. Broad insurance rate increases must be approved by the proper government agencies before they can go into effect.

Companies are just now setting their 2020 rates, so only time will tell how much rates will increase this upcoming year.

What California’s Fires Means for Your Premiums

If you live in the areas impacted by the California fires or have a business there, expect your premiums to increase for as long as these disasters continue taking place. Your insurance company will be looking for ways to offset the risk they’re taking on by insuring you, and the only way they can do that is to charge you more for your policy.

Perhaps you don’t live in an area that has seen fires, but you live close to them. Still expect to see your premiums increase a bit given your proximity to risk zones. If you find that these increases are more than your budget can handle, consult with an insurance broker to find out if there’s a better policy available to you.

LCK Insurance Agency is Here to Help

Leap | Carpenter | Kemps Insurance Agency can help you navigate the spike in premiums that you may be experiencing—or anticipate experiencing—in the wake of the California fires. Reach out to our knowledgeable agents today to see how we can help.

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About The Author

Pedro Ponce is a Commercial Insurance & Risk Advisor who has been representing his customers for over ten years. He holds a Certified Insurance Counselor designation and is currently working on becoming a Certified Risk Manager.

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