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Escalating Fire Cost Could Affect Calif. Home Insurance

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By GARY GENTILE, The Associated Press

Published: October 25, 2007

LOS ANGELES - Despite reassurances from state officials, homeowners in fire-ravaged Southern California might have plenty to worry about when it comes to their home insurance.

With damage estimates climbing daily, reaching $1 billion Wednesday, homeowners fear that insurance companies will raise rates or even cancel policies in the wake of the fires.

State officials and consumer advocates say that's not likely, but the scope of the fires and past tussles with insurers make many Californians skeptical.

Officials say they will be able to rein in rates, pointing out that insurance in California is highly regulated, and authorities are not likely to approve any increases in premiums, especially after pushing companies to reduce premiums this year.

Also, California remains the nation's largest market for homeowners insurance, which is a profitable line of business despite the risks.

That didn't stop Allstate Corp., the nation's second-largest property-casualty insurer, from announcing this year that it would no longer underwrite new California homeowner policies, citing risks from wildfires and earthquakes. The company is also seeking a 12 percent rate hike for its customers.

Situation 'Worrisome'

Major insurers are inspecting homes in high-risk areas in the West and threatening to cancel coverage if owners do not clear brush or take other precautions.

'Yeah, it's pretty worrisome. They might start not insuring us; that's pretty scary,' said Bruce Fowler, a resident of San Diego's Scripps Ranch neighborhood who was evacuated to Qualcomm Stadium this week.

Fowler's home narrowly escaped being destroyed in 2003, the last time fires swept Southern California with such ferocity. More then 3,600 homes were destroyed then, and insured losses surpassed $2 billion, according to the Insurance Information Institute.

So far, at least 1,500 homes across Southern California have been lost to the fires. The number is expected to rise.

Insurers Called Healthy

Insurers said they have sufficient reserves to pay claims that will likely surpass $1 billion.

'Insurance companies are in the business of taking these types of risk,' state Insurance Commissioner Steve Poizner said.

'The companies are in great health and have substantial reserves,' he said.

Poizner said he has talked to several insurance company CEOs in recent days and has been assured that they plan to swiftly pay claims.

On Wednesday, he declared an insurance state of emergency, allowing out-of-state claims adjustors not licensed in California to come to the state to handle claims.

Paul Hopkins, chief executive officer of Farmers Insurance Group, echoed Poizner's outlook.

'We don't set our rates or underwriting guidelines based on a single event,' Hopkins said. 'We have no desire, nor has it been our past policy, to start doing mass cancellations.'

But the likelihood of companies taking a harder look at underwriting and pricing policies increases with the price tag of the fire, said Donald Light, a senior analyst with Boston-based financial consultant Celent. 'The higher the final reckoning, the more likely companies are going to act.'

Recent insurance history reinforces the skeptics' view.

California had to form a special authority to sell earthquake coverage after insurers threatened to leave after the 1994 Northridge earthquake.

And after the 2005 Gulf Coast hurricanes, a number of companies, including Allstate and State Farm Fire & Casualty Co., raised rates, canceled or limited homeowner policies.

The companies' finances rebounded. After largely resolving claims from Hurricane Katrina, State Farm saw profits climb 65 percent to $5.32 billion in 2006, and Allstate had 2006 profits of $5 billion, nearly triple its 2005 level.

Full-year figures for 2007 are not yet available, but some companies have seen earnings slip.

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