California’s Home Insurance Crisis: Navigating the Aftermath of Wildfires
The recent wildfires in and around Los Angeles are predicted to be among the costliest disasters in U.S. history, placing immense strain on an already fragile insurance market. As California grapples with the aftermath, questions regarding the sustainability of home insurance have come to the forefront.
This is a disaster that is set to be among the costliest in U.S. history, and will place immense strain on an already stressed insurance industry.
Dave Jones, director of the Climate Risk Initiative at UC Berkeley’s Center for Law Energy & the Environment, offers critical insight into the unfolding crisis. As the California insurance commissioner from 2011 to 2018, Jones witnessed the fallout from some of the state’s most destructive wildfires.
“Growing risks and losses from climate change-driven events will outrun rate increases and other regulatory changes,” Jones stated.
The Insurer’s Dilemma
Insurers face a challenging landscape: on the one hand, they must fulfill their obligation to provide coverage, and on the other, they can not “rate increase their way out of the climate crisis.”
Jones points out that insurers requested and received regulatory changes last year. These changes included permission to use forward-looking models to calculate risk, and to include reinsurance costs. The state also provided relief from certain financial assessments. Despite these accommodations, the LA wildfires raise concerns whether insurers will remain committed to writing policies in high-risk areas.
The Impact of Climate Change
The core problem, as highlighted by Jones, is not only the severity of the wildfires but also the underlying driver: climate change. The increasing frequency and intensity of extreme weather events are predicted by climate scientists. “Insurance availability and pricing is the canary in the coal mine for the climate crisis, and the canary is about to expire.”
The FAIR Plan and its Challenges
The California FAIR (Fair Access to Insurance Requirements) Plan, is the state’s “insurer of last resort,” which has come under scrutiny. Designed to offer insurance when private companies decline coverage, the FAIR Plan is a statutorily mandated association of private insurers, not a state agency or taxpayer funded.
While the FAIR Plan can fulfill claims, the state FAIR Plan laws provide that, in the event the FAIR Plan has a shortfall of funds, it can charge all private insurers in the state based on their portion of the insurance market. The LA wildfires may exceed its reserves and reinsurance. The plan may then be forced to assess policyholders, something that could be in addition to any rate hikes.
Lessons from Florida
Florida’s experience serves as a cautionary tale. Even with relaxed regulations and high rates, national insurers have abandoned the state due to the escalating risks associated with climate change. This demonstrates that easing regulations may not be enough to counter the effects of a changing climate. As Jones puts it, “Florida is Exhibit A that relaxing insurance regulations and rate increases are not going to be sufficient to outrun climate change.”
What to Expect
In the short and medium terms, Jones anticipates that the regulatory changes, including those allowing insurers to charge more, can encourage insurers to start renewing and writing more policies. However, the long-term outlook points to inevitable instability. As climate change continues to fuel increasingly destructive weather events, insurers’ losses are going to keep climbing, and California’s home insurance industry faces an uncertain future.
Dave Jones says insurers are not going to be able to rate increase their way out of the climate crisis.
Helicopters spraying water over the Palisades Fire.
Resources for Policyholders
Homeowners dropped from their policies should investigate alternatives, including other insurers, surplus lines brokers, or the FAIR Plan. Those who are uninsured might qualify for very limited FEMA resources or federal loans.
Renters Insurance
Renters insurance will likely also be affected, with rates expected to rise as a result of the wildfires. Insurers might retract their willingness to write new policies.
This issue is complex. Without a significant change in the approach, both policyholders and policymakers must prepare for increased rates, limited availability, and an uncertain future.
