Economist’s Fight to Save California’s Home Insurance
An economist, forged by a harrowing experience, is dedicating her expertise to rescue California from a deepening home insurance crisis. Her insights, born from personal tragedy and a deep bench of academic knowledge, offer pathways to a more secure future for homeowners and a more stable insurance market.
This individual, Nancy Wallace, a professor at UC Berkeley’s Haas School of Business and a former advisor to the U.S. Treasury Department and Federal Reserve, witnessed firsthand the destructive power of wildfires during the devastating 1991 Oakland Hills fire.
A Personal Perspective on Wildfire Devastation
Wallace’s story begins with the Oakland Hills fire. She recounts the day she smelled smoke and, with her husband, quickly gathered family keepsakes. They jumped in their car and had to leave their home, as the neighborhood below them rapidly became engulfed in flames.
They narrowly escaped the inferno, driving down a one-lane road, surrounded by fire. On their way back, they saw many terrible things.
When they returned to their property, their home was gone. In the ashes, a porcelain bowl remained intact, a stark reminder of the fire’s destructive power. The Oakland Hills fire ultimately claimed 25 lives and destroyed around 3,000 homes. This ignited her determination to address the problem and find sustainable solutions.
The Economic Impact of Wildfires
Following the fire, Wallace and other economists began studying the effect of wildfires on the housing market. Surprisingly, houses rebuilt in these fire-prone areas often increased in value. This prompted them to investigate the reasons behind this phenomenon.
Using detailed data from Cal Fire, from 2001 to 2015, they found that properties rebuilt after being destroyed by fire were more valuable within five years. This was partly due to the newer construction, adherence to updated building codes, and the rebuilding of larger homes.
The Breakdown of California’s Insurance Market
California has been facing significant issues in its home insurance market. Regulations, initiated by Proposition 103, restricted insurance companies from using forward-looking models to assess risk, forcing them to focus on past loss data.
These regulations led to artificially low premiums, encouraging people to live in fire-prone areas. As wildfires became more frequent and intense due to climate change, insurance companies struggled to cover costs, leading many to leave the state.
This market failure resulted in many homeowners relying on the California FAIR Plan, a high-risk pool with limitations, and created difficulties for people with properties worth more than the plan’s maximum coverage.
Policy Changes and Future Solutions
Recognizing the critical state, California regulators, with Governor Gavin Newsom’s support, have amended insurance regulations, allowing insurers to use forward-looking risk models to set premiums. The government also provided incentives for insurers to underwrite additional policies in fire-prone areas.
Wallace asserts the need for building and refining statistical models so the risks associated with wildfires can be accurately assessed, enabling the setting of appropriate premiums. Higher premiums for homeowners would also act as an incentive to protect properties.
Crucially, Wallace advocates for incentives and practical assistance, such as new loan programs, to help homeowners retrofit older homes. This includes implementing fire-resistant construction materials. She points out that homes built after the mid-1990s, especially those built after 2008, are less susceptible to fire due to strengthened building codes.
Looking Ahead: Rebuilding and Resilience
Wallace forecasts that, in the wake of the recent fires, rebuilding efforts might differ due to a broken insurance market. There may be fewer homes constructed and higher premiums, resulting in more exclusive neighborhoods.
However, she remains optimistic. With the implementation of better infrastructure, adherence to stricter building codes, and a renewed insurance market, these neighborhoods can potentially regain their value, as they have done in the past.
Drawing on her personal experience, Wallace advises homeowners to document their losses and collaborate with builders to get precise estimates of rebuilding costs. These details are crucial for achieving adequate insurance payouts. She also makes the point that it is beneficial to have insurance, but that insurance companies are not on your side.
