California is the world’s fourth largest wine producer in volume. The regions of Napa and Sonoma are world-famous and are known for producing some of the most highly prized – and priced – wines. While wine lovers around the world are sitting back and enjoying a Sonoma Pinot Noir or Napa Cabernet, the vintners and growers of the region are feeling the squeeze as they try to figure out how to mitigate California’s burgeoning wildfire problem and how to insure their prized wine inventory.
For the better part of the past 20-years, the California wine business has turned to Lloyd’s of London, specifically the London Cargo Market, for its inventory Stock Throughput policies. However, after a tough year in 2017 that saw Lloyd’s suffer a $2.6 billion loss, the historic market initiated a strategic review, which included the axing of unprofitable lines. Unfortunately for vintners and growers in California, this resulted in Lloyd’s taking a hard stance against insuring wine stock halfway through 2019, leaving the US domestic market under great pressure to provide the much-needed coverage.
“It’s a total crisis. All eyes suddenly shifted over from London to the domestic market here in the US – but insurers here simply aren’t ready,” said Elizabeth Bishop, executive vice president at Heffernan Insurance Group. “There’s a tremendous pressure on US markets to respond, but many are saying they cannot offer the coverage until they’ve renewed their reinsurance treaties and renegotiated them so that they can respond to higher values. Other insurers are stepping in, but prices are rising due to reinsurance capacity being severely hindered by large major natural catastrophes that exceeded $160 billion in 2018.”
The other burning issue causing insurance and reinsurance firms to constrict coverage and raise costs is the “tremendous aggregation” of risk in the wine region, according to Debra Costa (pictured below), senior vice president and vintner practice leader at Heffernan Insurance Brokers. Just looking at the Napa and Sonoma regions, there are well over 800 wineries, which produce around 50% of retail value for the state, despite their production accounting for less than 10% of the state’s total. With such concentration of high-value wine in only a couple of proximate valleys, one major wildfire can result in a catastrophic loss event.
Amid these insurance capacity and risk aggregation concerns, some wineries in California are having to go without insurance and/or partially self-insure because they simply cannot afford the high rates carriers are passing on, Costa explained. She added: “In the most extreme cases, we’ve seen property rates for stock inflating by up to 300%. Also, some carriers are now choosing to insure properties outside of the ‘blanket limits,’ meaning they have specific limits for each building and contents within the building. This results in diminished coverage for the winery property if they are not insured to value. This can be compounded when construction costs rise as a result of higher demands for labor and supplies when a wildfire causes destruction through a large geographic area.”
In this environment, it’s important for brokers to prepare their clients’ expectations, Costa added. No-one likes to be taken by surprise and slapped with a 200-300% rate increase. As such, it’s important for brokers and agents to start the renewal process early, both Costa and Bishop stressed.
“Communication, communication, communication – that’s probably the number one thing,” Bishop and Costa told Insurance Business. “Clients don’t want to be taken by surprise. Most are budgeting for a flat insurance renewal on the calendar year in January, and for them to get hit with a substantial increase if they renew in third or fourth quarter, dramatically impacts the winery’s profit and loss statement. This large rate increase with reduced coverage is a hard one to swallow, so brokers and agents need to be communicating that as soon as possible.”