As California fires rage, one insurer uses AI for coverage

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(Bloomberg) –As the summer wildfire season gathers steam in California, one insurer using AI risk models is offering a lifeline to homeowners like Pete Rouse who are struggling to get coverage.

Rouse, a former firefighter, turned to Delos Insurance Solutions after his previous insurer pulled out, joining a host of companies that are either dramatically boosting prices or abandoning the state entirely. Never mind that Rouse’s home is in what he considers a safe area.

“It’s a track home with absolutely no high-risk vegetation around, but our rates just more than quadrupled,” Rouse said of the home he built in Chico, north of Sacramento in the late 1990s. 

While insurers like State Farm General Insurance Co. and Allstate Corp. are retreating to avoid costly fire damage claims, Delos is going all in. The San Francisco-based company has already sold more than 17,000 policies to homeowners rejected by other firms, taking on $28 billion of exposure across the most-populous US state. Sales are rising 5% a month, the company says.

Delos’s secret sauce is its wildfire models, which it says can predict risk for an individual home with greater accuracy than the rest of the market. The company works with university professors to get proprietary datasets on wildfire modeling, then adds an artificial intelligence-based algorithm to incorporate more data. Overall, Delos considers more than 200 variables, ranging from temperature to topography and vegetation, according to co-founder Shanna McIntyre.

Many insurance companies are generalists that use third-party software to measure wildfire risk. The various models have “a real spectrum of sophistication and granularity,” said Judson Boomhower, an assistant professor of economics at the University of California San Diego, who recently published a paper on the topic. 

Insurers with coarser modeling and pricing methods are more conservative, he said. They charge higher premiums or withdraw from some areas because they’re worried they might not understand the risk, given climate change and fast-evolving wildfire behavior, Boomhower said.

Delos’s models have identified three million homes across the US that aren’t exposed to wildfire and yet the owners can’t get coverage, according to Kevin Stein, chief executive officer and co-founder. That’s especially acute in California, where an estimated 11 million of the state’s 39 million residents live in high-risk zones, from the hills above Los Angeles to the vineyards of Napa.

Faced with a natural disaster they can’t accurately forecast, major insurers such as Tokio Marine America Insurance Co., Trans Pacific Insurance Co., State Farm and Allstate are retreating from California. Several of these firms blame state price caps for their pullback.

As a result, hundreds of thousands of homeowners have been unable to get their policies renewed, forcing many to turn to the state’s “last-resort” residual insurance plan. Since 2018, the number of policies at the plan has grown 170%, and it typically receives 1,000 new applications a day. 

Those who can get coverage face soaring premiums. In the wealthy enclaves of Bel-Air and Beverly Hills, homeowners are seeing jaw-dropping quotes of as much as $200,000 a year for coverage.

Rouse was running out of options before he reached out to Delos. His long-term insurance provider, Civil Service Employees Insurance, or CSE, pulled out of the state. His only other option, the last-resort California FAIR plan, was charging $3,500 a year for basic fire coverage, compared with about $900 at CSE. Rouse opted for a complete plan with Delos for $2,800 — still cheaper than the FAIR plan.

Homeowners have filed a lawsuit against the state-backed insurer, alleging it failed to provide necessary coverage. A spokesperson for the FAIR plan couldn’t be reached for comment.

Rouse lives near Paradise, where California’s deadliest wildfire killed at least 85 people and caused $16.5 billion in damages six years ago. Rouse says his house is in an area with “no wildfire threat whatsoever,” because there’s no wildland in his residential neighborhood. Yet most insurers go by zip codes, so his house was deemed high risk by many companies. 

Delos has raised between $13 million and $14 million since it started in 2017, backed by investors including Avanta Ventures and IA Capital Group. As an insurance agency, it isn’t subject to capital-reserve requirements because it doesn’t take any direct risk. That’s borne by third-party insurance companies, including firms under Lloyd’s of London.

Delos provides “non-admitted” insurance, which allows it to adopt predictive wildfire modeling and change pricing without requiring state review, according to Stein. This allows the company to calculate risk and adjust prices more quickly. The caveat with non-admitted insurance is that if Delos and its backers can’t pay up, the state won’t guarantee payouts to homeowners.

The challenge for Delos is to ensure its models work. If they don’t, and insured homes go up in flames, the outside firms would “pay off the claims, but then they’ll stop working with us,” Stein said. “Nobody would trust us, and we would basically go out of business.”

So far, Stein says homeowners have yet to make any wildfire-related claims. Delos is becoming a good fit for more customers, according to Harry Crusberg, Rouse’s agent and owner of Crusberg Decker Insurance Services Inc. in Pasadena.

“Maybe a year or two ago they might have been on the high side,” based on price, Crusberg said. But “you take those 30%, 40% rate increases across the board and now all of a sudden Delos is very competitive.”