California’s wildfire disaster has been followed quickly by an accelerating crisis for those householders lucky enough to survive with their homes intact.

But insurance policies are typically 12-month contracts and the terms and conditions of renewal are up to the insurance companies.

When claims become more likely, or the costs of rectification rise, offers of cover can be withdrawn as the term concludes, or higher premiums for renewal can be sought.

Insurance companies are financial intermediaries and cannot eliminate risk for the community at large.

All they can do is pool the risks, seeking small premiums from everyone in the expectation that most customers will make no claims at all in a given 12-month period.

The big payouts for the unfortunate, typically unaffordable multiples of the annual premium, are financed from claims reserves and the companies must accept that reserves build up in the good years and are run down when natural disasters or epidemics result in an excess of payouts over premium income.

Regulation

Insurance companies are licensed and regulated by governments which have rules about the adequacy of claims reserves and they have minimum ratios of premium income to business written.

In Ireland, the historical record is not impressive

Any company which breaks the rules is supposed to have its operations curtailed or closed down.

In Ireland, the historical record is not impressive and there has been a history of insurance company failures stretching back to the demise of PMPA in 1984.

Quinn Insurance collapsed in 2010 and Setanta in 2014.

These companies wrote motor insurance business and had built up market share on the back of premiums which appeared to be competitive.

In all three cases, the regulators failed to spot that the source of their popularity with the public, for whom car insurance is compulsory, was that premiums were simply too low.

In the case of Setanta, which was Irish-owned and did all its business in Ireland, the company operated under the jurisdiction of Malta, with ‘passported’ permission to operate here under EU single market rules.

The Maltese regulator declined to extend the Maltese protection scheme to Irish policyholders.

Compensation

In these cases of bust insurance companies, a government scheme provides support to high-and-dry policyholders via the Insurance Compensation Fund.

It does not make the costs go away, it levies them on all policyholders, in effect an indirect tax whose proceeds are earmarked for compensation to those lured into bargain premiums which proved to be inadequate.

The quality of bank and insurance supervision has also improved

It is likely you are still paying this indirect tax every time you renew a policy.

There has also been a tightening of European rules – banks, where the Irish State bailout of depositors and bondholders cost far more than the insurance failures, are now expected to hold assets in each jurisdiction.

The quality of bank and insurance supervision has also improved.

The Irish State has got into the habit of retrospectively assuming compensation risks, directly financed by the Exchequer.

The regular overshoots in government spending against budget, admitted once again in the Department of Finance end-year figures for 2024, are due in part to excess costs on capital projects like the €1.6 billion overshoot for the National Children’s Hospital.

But the government has also become an insurer-of-last-resort and on a substantial scale.

Government budget estimates do not include provisions for contingent liabilities, amounts which become payable when misfortune strikes and there is a public demand for assistance, for example to people who bought dodgy bricks in Donegal and elsewhere, or to the women and children who suffered abuse in the scandal at mother and baby homes.

There is a current example – hauliers put to extra expense by the storm damage to Holyhead port have promptly been promised €60m by the junior minister for transport.

There is no provision in budget projections for these contingent liabilities, which have become a regular source of failure to keep spending inside budgeted figures.

Insurance companies would be in breach if they did the same, and professional standards of the main accounting bodies require that best estimates of contingent liabilities are provided by auditors.

The Government is, in effect, exempting itself from prudential rules which it applies to everyone else.

Holders of insurance policies would be foolish to assume that they will be covered by ad-hoc schemes created by politicians, especially if they have under-insured.

Last week in the Irish Farmers Journal, Noel Bardon reported that FBD had urged farmers to ‘check the details of their insurance policy if they are unsure of the level of cover provided for weather-related farm buildings or livestock damages’.

Householders in California are, too late, checking their home insurance cover and finding that they will not be getting the payouts they expected. California’s state compensation fund has not built up adequate reserves and there will be a row about who pays.