We’re a company with deep roots in California. Our Co-Founder, Patrick Johnston, was a dairy farmer here and we have many friends, clients, and cherished memories in the Golden State. We love California. We also know that many Californians – especially in rural areas – know what it means to lose everything to fire. To that end, it’s important to understand how recent events will affect the world of insurance and risk assessment, because unfortunately, events that should be quite rare are becoming all-to-predictable.

Humans are terrible at assessing and understanding risk. So it is not a surprise that words like “unprecedented” and “shocking” are being used to describe the fires that have decimated entire neighborhoods in Los Angeles. Drought and the Santa Ana winds turned a dry landscape into kindling. Few of those affected imagined their home being destroyed, and yet we’ve seen similar headlines throughout California in recent years. And as a long-time Angelino can tell you, this is not the first time horrific fires have scorched Los Angeles, let alone other parts of the state.

Politicians will be blamed, fingers will be pointed, pundits will debate, trolls will tweet. Meanwhile, neighborhoods and dreams are in a twisted ruin. A very expensive ruin. According to The Guardian, the LA fires are estimated to soar past an unimaginable $200 billion dollars in losses. And even as families discover whether their home was spared or lost, teams of very expensive lawyers are determining exactly how to deny coverage.

Will the bottom fall out of the California insurance market? We don’t know. Are the losses absolutely staggering? You bet.

California law requires insurance companies to hold reserves enough to pay out claims. And, the insurance companies themselves are insured, having bought “reinsurance.” The future is unknowable. But it is predictable. We don’t expect to see any major companies become insolvent. And yet, we can also say that these “unprecedented” and “shocking” events are anything but. Traditional insurance carriers are in the business of returning a profit to shareholders while holding onto the cash needed to pay out claimholders in the event of a crisis. The reasons they have pulled out prior to these fires is regulatory issues in California. The reason they will pull out AFTER this is because the costs of doing business will simply be too high. We expect simple math will cause major carriers to just shrug and back out of highly regulated, crisis-prone California.

It’s helpful to understand some math and realize that, as a matter of pure statistics, we do not know what sort of calamity is waiting. But we do know the odds are very good that a crisis lurks like a hungry wolf at the door.

Let’s take a look at risks in the California Agricultural sector.

The purpose of this is not to scare you. The purpose is to correct for a human bias. That is, we humans are very poor at predicting the probability and impact of unlikely events. As the example above shows, even with very unlikely events, the probability that one of them occurs is very high! It’s clear you can’t count on government or insurance companies to swoop in and protect you. Insurance companies see the same numbers, the same models, the same regulatory environment. But there is good news. Captive insurance can protect you and your family from the financial freefall of catastrophic loss, including fire loss, even when you can’t find traditional coverage. Find a solution you can count on with 3F. We’re here to share more information, anytime.

Keep safe.

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