Judge Rules CA Insurer Insolvent Because Of Camp Fire; $64M In Paradise Liabilities, $23M In Assets

[hatrack]

Millions of dollars in potential losses from the Camp Fire have ruined a small Merced County insurance company, providing another element of uncertainty for homeowners following the deadliest and most destructive wildfire in California’s history.

A judge declared Merced Property & Casualty Co. of Atwater insolvent during a brief court hearing Monday afternoon in Merced County Superior Court. The ruling by Judge Brian McCabe allows the state Department of Insurance to seize control of the busted company.

Merced Property is facing about $64 million in potential liabilities in Paradise, the state agency said in court papers. The monetary pain could go even higher: A financial statement the company filed with regulators said it had sold a total of $141 million worth of coverage in the area affected by the Camp Fire, although reinsurance policies will cover some of its losses. Reinsurance is coverage purchased by insurers to handle major disasters.

Policyholder claims will surely dwarf the company’s finances, listed as more than $23 million in stocks and other financial assets. “Merced incurred significant losses as a result of the Camp Fire,” Insurance Commissioner Dave Jones’ office announced. “Based upon preliminary confirmation of multiple total losses and mounting claims, the financial condition of Merced deteriorated rapidly.”

EDIT

https://www.sacbee.com/news/state/california/fires/article222563185.html

[lapfog_1]

1. As a small insurance company

diversification of risk is paramount.

They should have sold off (to re-insurers) some 90% of the risk they undertook in the single area.

But I'm sure they realize all of this... now.

[TexasTowelie]

3. The fact that they had the reinsurance contracts and transferred some of the risks

means that the company the capacity to underwrite more policies. It really depends on the terms of their reinsurance treaties as to whether they properly transferred that risk. Some treaties transfer a set percentage of all risks such as the 90% figure that you quoted, while other treaties may transfer 100% of the risk above a set dollar amount to reinsurance (meaning that a lot of relatively small claims like $25K and $30K vehicles could cripple a company). Other reinsurance treaties may transfer business based upon the lines of business (auto, general liability, homeowners, workers comp, etc.)

The good news is that most policyholders should recover most of their losses from the state guaranty fund, although there will be delays in processing claims. The most exposed are those that own more expensive properties if their loss exceeds the amount that the guaranty fund pays.

The bad news is that the sales and marketing staff will be terminated almost immediately. Most of the underwriting, actuarial, and HR staff will follow in the next few months. The executive staff, statistical, accounts payable, claims, in-house counsel and IT personnel will be around for a longer period of time and will likely be offered bonuses to remain with the company and assist in the liquidation of the company.

[hatrack]

4. Per the article, the guaranty cuts off at $500k . . .

Not sure if that would affect most properties in and around Paradise, but likely there are some luxury homes back of beyond up there where the owners are going to get clipped.

[TexasTowelie]

5. Thanks, I didn't read that far in the link so I didn't know the California guaranty fund limits.

Full disclosure: I was on the early warning team for insurer insolvencies at TDI and I also worked for a P&C insurance company that voluntarily liquidated (no state receivership).

[TexasTowelie]

2. Natural disasters are huge risks for small regional insurance companies

and why they rarely receive "A" ratings from A.M. Best. While the reinsurance policies allowed the company the leeway to underwrite more policies, the overall ratio of exposure to capital and the quick action to declare an insolvency are signs that the company was already under scrutiny by the California Department of Insurance prior to the wildfire.