Heading into 2018, the top drivers of California’s insurance industry will echo 2017’s biggest headlines, from December’s record-breaking fires and large-scale cybercrimes to intra-industry mergers and acquisitions. Natural disasters always drive up property insurance, and last year saw three major hurricanes and local wildfires impacting the industry. “Houston was a big hit because that storm just stopped over the city,” said Chris Poveromo, executive vice president of Poms & Associates, No.3 on the Business Journal’s list of largest insurance brokerage firms. “We have a large mall operator that had a significant loss in Houston. The losses in Florida weren’t as bad as expected.” Closer to home, wildfires and mudslides in California, including December’s Thomas Fire, the worst fire in California’s history, plus smaller blazes near Sylmar and Santa Clarita, may prompt reinsurers to tighten terms and boost rates. “2017 was the most costly year on record in insurance,” said Timothy Gaspar, founder of Woodland Hills-based Gaspar Insurance Services, Inc., which ranks No. 13 on the list. “All the insurance companies have lost a lot in 2017. Without question, there’ll be rate increases in 2018.” While the fires ultimately impacted more homes than businesses, “we have warehouses that we insure in Santa Clarita,” Gaspar said. “A lot of insurance companies are not going to do it.” Ditto movie ranches nestled in rustic, hillside parts of Simi Valley and Santa Clarita, where Gaspar Insurance had to handle a food manufacturer’s claim of $100,000 in damages after wind sent smoke into the building. “The food had to be destroyed because of all the smoke,” Gaspar said. “They were shut down for three business days.” Another client, a Santa Barbara winery with a tasting room, incurred huge income losses from closure. “They had ash that just rained down all over (the inventory),” Gaspar said. ‘Everything had to be professionally cleaned.” Expect to see business property rates rise about 5 percent this year, he said. Cybercrime protection A looming issue in 2018 is cyber-insurance. “That’s the absolute brave new world in the industry, when you look at how ubiquitous tech is to all kinds of businesses, even contractors and retailers,” Poveromo said. “Look at (the insurance) business: if we had a cyber ransom, our systems would come to a standstill.” Ransomware breaches, phishing emails and the internal version of phishing, social engineering, have all made cyber-insurance a necessity, Gaspar and Poveromo agreed. Poveromo said the first inklings of companywide hacking arose about a decade ago, with the cyber-insurance market beginning to smolder five years ago. The tipping point was two major breaches with national retailers: T.J. Maxx in 2007 and Target in 2013, Poveromo said. Indeed, four of the most high-profile cyber-attacks took place in the last five years, with two last year. Information for 1.6 million users was compromised shortly after PayPal acquired digital bill-payment company TIO Networks, and the infiltration of consumer credit reporting giant Equifax jeopardized the personal information of 145.5 million Americans – nearly half the U.S. population. Gaspar’s firm had to cover a company after a phishing scam tricked the comptroller into sending over W2s, upon which the scammer filed fake tax returns for all the employees. Other companies experienced cyber criminals targeting its websites and shaking them down for allegedly non-authorized artistic elements. “The bad news is that most companies still don’t have cyber-insurance. A lot of people who think they’re not at risk are getting hit all the time. CPAs are a big target. A hacker will hit them and tie up the system and demand a ransom to unlock it,” said Gaspar. Poveromo reported similar recent attacks on hospital systems. Brokerage M&As Last year also saw an acceleration of mergers and acquisitions. According to Insurance Journal, brokerage mergers and acquisitions deals totaled 457 by 2017’s third quarter; a record pace forecast to be equaled or exceeded this year. In fact, Poveromo said, insurance has been a hot M&A market for a decade. “But in the last 24 months, there’s been some private equity firms out of nowhere like Acrisure and Assured Partners,” he said. “They have driven up the price point to acquire these firms.” In the Valley, M&As have included Arthur J. Gallagher Co., the top company on the Business Journal’s list, buying Woodland Hills-based SGB-NIA Insurance Brokers in 2014; and Hub International Insurance Services’ takeover of GNW-Evergreen Insurance Services in Encino also in 2014. “Insurance agencies have been identified as good targets to acquire,” Gaspar said. “There are about five or six (entities) going after companies nationwide.” The reason why the brokerage consolidations are making headlines right now, Poveromo continued, is because of “the prices they’re paying are more than double what they were paying five or six years ago. It’s an interesting time for people who built up small agencies.” He predicted more brokerages changing hands in the coming decade as baby boomers retire. “Our industry is an older industry,” he said. “(California is) the largest middle market in the country. This industry is poised regionally to make a major shift.”