Drought Risks Multiply in the Golden State

February 15, 2015| Von Liz Berge | Property | English

Region: U.S.

Drought is creating havoc with California’s economy. The UC Davis Center for Watershed Sciences estimates the total statewide economic cost of the drought in 2014 will be $2.2 billion, with a total loss of 17,100 seasonal, part-time and full-time jobs.

Such has been the impact of drought on the state’s $45 billion agricultural sector, which has reduced yields in fruit and vegetable crops and is being felt in homes and businesses across the U.S.

Nor is the land going to recover any time soon. NASA satellite data shows it will take about 11 trillion gallons of water (around 1.5 times the maximum volume of the largest U.S. reservoir) to restore supplies.

Droughts are classified on a scale of D0 (Abnormally Dry) to D4 (Exceptional Drought). As of January 6, 32% of California was experiencing D4 conditions and 78% of the state was experiencing D3 to D4.1 More than 37 million residents of California have been affected by the drought - leaving only 3% of the state not living in a drought area.

Most worrying for homeowners and businesses is that the situation seems to get worse every year. So, if they haven’t done so already, insurers active in California now need to factor drought and its accompanying risks into their underwriting strategy.

Clearly, wildfire is a peril underwriters must consider when underwriting fire policies in California because drought has led to more frequent and severe fire losses in the state. From July through September last year as many as 19 wildfires were burning simultaneously across California, each greater than 300 acres in size.

The unpredictable King Fire was the largest, burning a total of almost 98,000 acres from September 13 through October 2, 2014, before it was finally contained by more than 5,000 fire fighters drafted from many different states. The Eiler fire, which burned around 32,000 acres last summer, took longer to control and additional structures burned after a town in Shasta County ran out of water.

Thanks to extensive water conservation efforts, there has not yet been a significant impact on the availability of water for fighting fires. But the signs aren’t good and it is something that property underwriters should keep in mind when addressing risks in wildfire areas. Oddly, droughts can cause mudslides as well as fires. These happen because California’s glaciers melt due to the lack of an insulating snow cover. The massive mudslide that occurred in September on Mt. Shasta was likely due to the drought, according to the U.S. Forest Service. Similar types of drought-caused mudslides have happened before in California, with one covering an area five miles long, a mile wide and 10 feet deep.

Drought’s damaging effect on produce grown on California’s farms can have unexpected implications for insurers everywhere. As a result of shortages, commodity prices can increase sharply, say for almonds and lemons. So underwriters should review policy values and the valuation basis to ensure that stock values, including any Peak Season Endorsements, are adequate.

Of course, there is a counterpoint to California’s drought crisis and that’s the rain storms that battered the West Coast in the summer. But what’s clear is that weather volatility is the new normal and the onus is on insurers to take account of these extremes when underwriting risks in the Golden State.

1. Drought lingers in West and southern Plains but major precipitation headed for Northern California (U.S Drought Monitor News, 2015)


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