Insurance: the Other Threat to the Wine Industry

Catastrophic events of recent years have driven hikes in insurance premiums to stratospheric levels. Jeff Siegel reports.

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Burning vineyards (Photo: Anastasiia/stock.adobe.com, AI generated)
Burning vineyards (Photo: Anastasiia/stock.adobe.com, AI generated)

Paul and Jennifer Tincknell own a 14-acre vineyard in Sonoma and, until 2022, the insurance for their property and its buildings cost about $3,100 per year. Then, in 2022, their carrier dropped them, saying it would no longer insure commercial farm property in the Tincknells’ area, though it would continue to cover residential property.

Paul Tincknell, who is also a wine marketer, tells this story with more than a touch of irony. His insurance carrier dropped him, but didn’t drop any of his neighbours, even though their property backs onto his vineyard — because the neighbours had residential and not commercial policies. And did he mention that the vineyard is near a state fire station with a supply pond?

“It is a perfect storm of economic and societal factors that will make small, family vineyards a rarity, at least in California.”

While the Tincknells were able to find coverage, their premiums rose to $5,400 in 2023 — a 154% increase. Paul says they are terrified to see what their 2024 renewal will cost.

“It is a perfect storm of economic and societal factors that will make small, family vineyards a rarity, at least in California,” he says. “Who can afford 154% increases?”

Which, in one anecdote, pretty much sums up the on-going insurance crisis in California, especially for wineries.
 

Drought, fire and catastrophe

It started a couple of years ago in the wake of three devastating wildfire seasons and the 2021-22 drought, when some of the country’s biggest insurers, including Allstate, State Farm and Nationwide, either stopped writing policies altogether, stopped writing new policies, or said they would be choosier about what they would cover. And most have raised rates significantly — often triple digit percentages. Sometimes those higher rates only buy less coverage.

This has affected millions of homeowners throughout the state, and the number who get insurance from the state-run, last-resort FAIR plan — designed for those who can’t get private insurance — has almost tripled. Meanwhile, the state’s exposure to FAIR Plan losses has increased more than six-fold. It has been so bad, according to one report, that a small town couldn’t get insurance to cover the building a new fire station.

It has been so bad, according to one report, that a small town couldn’t get insurance to cover the building a new fire station.

But the crisis has had the potential to be even more damaging to the California wine industry, given that much of it is located in prime wildfire country; the area around Napa and Sonoma saw large portions destroyed in the state’s historic 2017 and 2020 fires. Hence, if they weren’t dropped, rates increased by 300% from one year to the next.

The lucky ones just faced double-digit rate hikes as well as what’s called mitigation — the requirement to cut vegetation that might offer fuel to fires, plus re-landscape wineries, tear down buildings, and repaint existing facilities with more fire-resistant material. Michael Haney, the executive director of Sonoma County Vintners, a trade group with some 250 members, estimates that as many as three-quarters of his wineries have had to buy four to six policies to get enough coverage.

How can any winery, save for the biggest, stay in business without affordable insurance?

“We know insurance coverage for wineries and wine grape growers in fire-prone areas is a serious problem,” says the Wine Institute’s Tim Schmelzer, vice president California State Relations for the trade group that represents the state’s wine industry, and has been lobbying state officials and insurers to find a way around the impasse.

In other words, how can any winery, save for the biggest, stay in business without affordable insurance?
 

Forced changes

The good news, say some wine industry executives and local officials, is that maybe, just maybe, there is a glint of light at the end of the tunnel, and maybe, just maybe, some progress has been made.

With the emphasis on maybe.

“The situation is so bad that any positive direction forward is a good sign,” says Michelle Novi, Counsel & Senior Director of Industry Relations at Napa Valley Vintners, a trade group with some 550 members. “But the gravity and scope of the problem is so massive, and the changes we’ve seen have been so small and so incremental, that we still have a very long way to go. The insurance companies are using a machete, when a scalpel would be a more appropriate tool.”

That positive direction revolves around a variety of recent developments that haven seen state, federal, and local officials — as well as some insurers — recognize that the current system of rate hikes, less coverage, and political sniping has done little to solve the problem.
 

A regulated business

In  the US system, most insurance is sold by private companies, who can pick and choose who they sell to and where they want to do business, according to the laws of the state they do business in. Each state regulates those insurers; this includes setting rules for the companies’ financial stability and that they deal fairly with consumers in paying claims. About half of the states, including California, require insurers to get some form of rate approval from state regulators.

The latter has been at the centre of the California crisis. It’s a complex topic, but at its most basic, insurers wanted to change the way they calculated rates following the 2017 and 2020 wildfires to a system called catastrophe modelling. 

This puts more emphasis on predicting what will happen, as opposed to traditional models, which use historical data. Generally, the former would set rates based on the chance of a major disaster like a wildfire in the future, based on computer simulation models instead of how often disasters happened in the past. In this, catastrophe modelling takes into account scenarios made possible, for example, by climate change.
 

Catastrophe modelling vs Sustainable Insurance Strategy 

California regulators refused to approve rate hikes based on catastrophe modelling, arguing that premiums based on predictions were unfair to consumers. So the insurers refused to write new policies, saying the state’s position was financially untenable for them. Another reason for this, say insurers, are significantly higher costs for reinsurance -- policies insurers buy from third parties to help cover their exposure. The Bankrate financial trade publication reported that "property reinsurance premiums have risen 50% from April to July 2023.

How many insurers have left the state is unclear. What is known, according to one report, is that the seven companies that accounted for about one-third of the state’s home insurance market in 2022 either stopped or cut back on writing new policies.

The insurers refused to write new policies, saying the state’s position was financially untenable for them.

That standoff looks to have changed — sort of. State officials proposed several reforms, called the Sustainable Insurance Strategy, in September 2023. It would allow insurers to use catastrophe modelling to set rates. In exchange, the state promised quicker action on rate requests but also expected insurers to write policies in high-risk areas and to offer rate reductions for mitigation, which many had refused to do. It also asked the insurers to work with the state to help FAIR plan policyholders buy private insurance to reduce the state’s exposure.

Some insurers responded favourably; State Farm, which had limited new policies, got permission to raise rates by 20% in March.
 

Policymakers are getting involved

The federal government may be getting involved, something it had failed to do in the past couple of years. In April,  Rep. Mike Thompson (D-CA), who represents Wine Country, co-authored a bill that would give policyholders in disaster-prone regions tax and grant incentives to perform mitigation. The goal, says a Thompson spokeswoman, is to help bring insurers back into the market and lower rates, both in California and other states, like Florida, which have also seen insurers cut back in the wake of natural disasters.

The proposal is not like the federal guarantee for terrorism insurance, passed in the wake of the September 11 attack, and which reimburses private insurers for a portion of their losses. This, says Novi, may be the best approach for dealing with California’s crisis — a combination of mitigation, responsible property management, and federal guarantees.

The best approach for dealing with California’s crisis may be a combination of mitigation, responsible property management, and federal guarantees.

And it’s not the same as underwriting flood insurance, which the U.S. has done since 1968. In addition, the bill has no sponsor in the Senate; any legislation would have to pass both houses of Congress and be signed into law by the president.

Still, says Haney, all of this is a huge stop forward. 

“Getting access to insurance, as well as the cost of insurance, remains quite challenging for our members,” he says. “We’re certainly not home yet, but the situation does seem to be getting a little better.”

And will hopefully continue to improve – even at a little bit at the time.

 

 

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