By Michael Loney
April 10 - (The Insurer) - High-net worth private clients are finding their insurance contracts have proven inadequate for addressing the Los Angeles wildfires losses, Arthur J Gallagher has said, with the broker suggesting steps for the market to rebuild trust and resilience.
In a report on the private client market, Gallagher said that California’s insurance market “has reached a critical tipping point,” with the Los Angeles wildfires exposing vulnerabilities in an already strained system that will not be resolved quickly or easily.
“Private clients navigating the aftermath face a prolonged and frustrating journey of dealing with insurance carriers, whose contracts – limited in scope by designs – have proven inadequate for addressing losses of this magnitude,” the report said.
The wildfires have exposed the “stark reality” that the limits of the HNW policies bought by homeowners in high-risk areas “are now painfully clear,” the broker added.
“California’s insurance market has long struggled with a mismatch between premiums and risks. For example, homeowners in high-risk areas like Los Angeles often pay median premiums that don’t fully account for wildfire exposure, while broader regulatory constraints discourage insurers from pricing policies at sustainable levels,” the report said.
Gallagher said that the Los Angeles wildfires have illuminated the personal and systemic vulnerabilities that arise when insurance markets fail to adapt to evolving risks.
The broker suggested that to rebuild trust and resilience essential steps include risk-based pricing, regulatory reforms and innovative coverage solutions such as parametric insurance, captives or public-private risk-sharing pools to address coverage gaps in high-risk areas.
In addition, Gallagher said that insurers should have a responsibility to ensure homes are insurable by assessing factors such as property density.
It also suggested enhanced additional living expenses to account for the extended displacement times often required after catastrophic events. Standard ALE coverage is typically 20% of the dwelling coverage, which for a $3 million home equates to $600,000.
“With temporary housing costs potentially reaching $20,000 per month, homeowners could exhaust their ALE coverage in as little as 30 months, leaving them to bear additional costs personally,” the report said.
HNW CARRIERS WITHDRAWING FROM HIGH-RISK STATES
HNW coverage is harder to get and more expensive to maintain in more states, Gallagher said in the report. The broker noted the surging costs of claims.
“Many clients feel their properties are overinsured; however, the reality is quite the opposite,” the report said. “Many carriers are withdrawing from high-risk states like California and Florida or retreating from regions with complex regulatory or legal environments. Those who remain often renew policies at values below the property’s worth, impose strict underwriting limits, or offer coverage solely on an excess and surplus (E&S) or ‘ex-wind’ basis, both of which contribute to considerable rate hikes and significant aggravation in the event of a claim,” the report said.
Gallagher said that only a handful of carriers continue to provide viable solutions within the admitted market, “resulting in coverage-limited options for high-net-worth clients.”
The broker warned that HNW clients will also be affected by carriers’ increased reinsurance costs in recent years.
“And as reinsurers grow increasingly selective about which risks and regions they will cover, we will continue to see fewer choices within the private client market,” the report said.
E&S coverage is the new norm for HNW clients in high-risk regions, Gallagher continued.
But it cautioned that “most E&S carriers lack the expertise needed to adjust complex claims for private clients and nearly always use third-party adjusters and appraisers, making the role of advisor even more critical.”
The report added that concepts such as captives and parametric insurance are continuing to gain traction in the high-net-worth space, but they have yet to become a staple for most clients and are still relatively unknown to most.
The report also suggested that HNW individuals are “dangerously under-protected” against liability damage awards,
A recent Chubb report said that 90% of wealthy respondents are concerned about the financial fallout of liability claims but only 36% hold sufficient excess liability coverage to adequately protect themselves,
Gallagher highlighted a “troubling” rise in jury awards against HNW individuals.
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