STATE FARM SUPO QUE UNA CATÁSTROFE FINANCIERA EN LOS ÁNGELES ERA CUESTIÓN DE TIEMPO https://t.co/nqCUGXuvIL
— Guillermo Ruiz Zapatero (@ruiz_zapatero) January 13, 2025
Los seguros y sus precios son un mecanismo de mercado para conocer por qué un riesgo normal deja de ser un problema de riesgo actuarial y se convierte en "riesgo país"
STATE FARM KNEW A LOS ANGELES (FINANCIAL) CATASTROPHE WAS ONLY A MATTER OF TIME
Insurance isn’t really an area that I had much interest in, mostly because in the countries where I’ve lived, it has generally been a well-run and stable business. However, the recent Los Angeles wildfires prompted me to look into this sector in California more closely, and what I discovered is utterly shocking.
Let’s start with the first table where we can see the number of policies that were not renewed in LA in 2024 by State Farm
Frankly, I am no conspiracy theorist, but honestly speaking, what are the chances that State Farm walks away from renewing 70% of the insurance policies in an area that, a few months later, was totally wiped out by wildfires? Clearly, the inspectors figured out something that many overlooked: LA Palisades water reserves being effectively offline for months with no clear date for them to be back in full operation (State to probe why Pacific Palisades reservoir was offline, empty when firestorm exploded.) increased risks to an extent that they were not insurable.
Other insurance companies, even if more “relaxed” about it, were not totally blind to the risk either. Even though they did not pull out of the market, they increased their policy costs so much that the vast majority could not afford it and ended up switching to the only affordable alternative available: the California FAIR plan.
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The FAIR Plan has established coverage limits to accommodate various property types:
Residential Properties: Up to $3 million per location.
Commercial Properties: Up to $20 million per location.
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Among the relevant exclusions, we find arson not only when it’s a direct consequence of policyholder actions but also when it’s a direct consequence of “acts of war” or “civil unrest”. The latter is likely where lawyers are already gearing up to build their case, considering several arsonists have been arrested for starting fires with the intent of looting properties.
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Considering 1,430 homes in Palisades alone were under a CA FAIR plan and they were all pretty much destroyed, assuming the lawyers cannot prove the act of civil unrest and using the $3.3M median house price, the total damages in this area alone total ~$4.7B. Can the CA FAIR cover it? The answer is no.
As per the latest available figures, the CA FAIR plan only had ~$200M of capital surplus to cover damages for the whole of California, with only an additional $2.5B reinsured as a whole. CA FAIR instead underwrote $458B of risk, a shocking 63% increase from the year before and a massive red flag everyone but State Farm apparently ignored. As a matter of fact, Palisades’ damages alone wiped out the CA FAIR insurance scheme.
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The latest figures by AccuWeather put the total damages from current wildfires at an amount greater than $250B, and considering the fires are still raging, this figure is expected to continue increasing significantly, besides being already greater than the total capital surplus of all the private insurers operating in the state (State Farm California subsidiary only had a $1.3B capital surplus as of 2023).
The only solution here is a bailout of the whole California Insurance system, and there are not many alternatives to it, considering that banks and those who bought MBS backed by California mortgages will be hit by massive losses otherwise. The real question now is, can the US afford to bail out the whole California insurance system while already running a record deficit and needing to refinance $9.5 trillion of Treasuries due to mature in 2025 without the FED monetizing a big chunk of it? I bet many investors are already running the numbers and calculating the consequences on the economy, especially on inflation that was already reignited by the FED’s reckless rate cuts in 2024.
