Beyond the tragic loss of life, the wildfires raging in Los Angeles have shined a spotlight on California’s property insurance crisis.
While many news headlines have focused on a lack of homeowner’s insurance coverage, commercial property coverage faces similar challenges.
To help address the problem, more businesses are turning to a nontraditional coverage option called parametrics to beef up protection against wildfire risk and plug any gaps left by traditional insurance policies, experts told CFO Brew.
Parametric coverage is a good option for businesses because even if their properties aren’t destroyed, they may still lose income due to employees not being able to work, Janet Ruiz, director of strategic communication at the Insurance Information Institute, told CFO Brew.
“There’s a lot of issues for commercial [properties] after these big catastrophes,” she said. “The Los Angeles fires have a lot more commercial [properties affected] throughout the areas than some of the risk areas we see that are more rural.”
Para-what? The name may suggest something mystical and complicated—also, because everything in insurance seems like it has to be complicated—but parametric insurance is relatively straightforward.
Traditional property insurance covers the specific losses a policyholder suffers. But first, the business must document the losses and file a claim, and then there’s a whole adjustment process that insurers go through to determine how much of the claim they’re required to pay.
Alternatively, a parametric policy stipulates that coverage is triggered once the catastrophic event occurs, assuming specific conditions are met. This makes payouts faster. Parametric wildfire plans, for example, will set a specific radius around the covered property, and payout will occur if satellite imagery shows a wildfire burned any part of that area, according to Austin James, managing director of McGowan Wholesale’s property division, who works with retail brokers—those working directly with the insurance buyers—to find coverage for their clients’ hardest-to-place risks.
“If any of that area…is burned by wildfire, then the client would have access to 100% of the limit that they purchased,” James told CFO Brew. The radius is small enough that property damage is likely, but businesses usually sign a statement acknowledging that they suffered losses, he added.
Gaining popularity. Once more commonly used by large national firms, parametric insurance has sparked interest in mid-size buyers such as multifamily property owners, James said. Organizations may purchase a parametric wildfire plan to help pay their traditional property policies’ high deductibles or because their traditional plans exclude wildfire losses, he said. Some are even buying only parametric wildfire policies and nothing else—meaning they may have no insurance requirements from a lender and only want protection against the one peril.
According to a recent Allied Market Research report, the global parametric insurance market totaled $18 billion in value in 2023, and could grow to an estimated $34.4 billion by 2033.
Parametric insurance may be simple, but it ain’t cheap. The insurance companies agreeing to blanket payouts have a good idea of what they should be charging, James said. A $1 million wildfire policy charges an annual premium in the ballpark of $10,000 to $50,000. While an organization may feel some sticker shock, it’s actually a pretty good deal, he explained.
“Parametric wildfire, in my opinion, is generally the most affordable parametric out there for any peril,” James said. Compared to other catastrophes like hurricanes, hail, tornadoes, and floods, “fire is the leanest on rate.”
Why is property insurance getting so expensive, anyway? According to a National Bureau of Economic Research (NBER) working paper, property insurance premiums increased more than 30% between 2020 and 2023. Insurance buyers in high-risk areas are becoming increasingly susceptible to premium hikes, according to NBER.
Wildfire risk “plagues commercial property owners” in California more than any other state, according to McGowan Wholesale.
California has unique challenges in pricing and coverage availability. Until recently, the state prevented carriers from factoring in forward-looking wildfire catastrophe models and the cost of reinsurance when calculating their rates.
In December, the state Department of Insurance announced new regulations that allowed carriers to use those factors in ratemaking, but also required carriers to increase coverage in areas at high risk of wildfire.
This report was originally published by CFO Brew.
