What’s Next for Home Insurance in California After the Los Angeles Fires?
With the smoke still clearing from the recent wildfires in and around Los Angeles, the insurance industry in California faces another period of immense strain. The fires, predicted to be among the costliest disasters in U.S. history, have raised critical questions about the future of home insurance in the Golden State. To gain insight, UC Berkeley News spoke with Dave Jones, director of the Climate Risk Initiative at UC Berkeley’s Center for Law Energy & the Environment, and former California insurance commissioner.
Dave Jones smiles for a headshot wearing a dark suit and red tie
Jones, who served two terms as California insurance commissioner from 2011 to 2018, has observed this cycle before. As he explained, “Growing risks and losses from climate change-driven events will outrun rate increases and other regulatory changes… Insurance availability and pricing is the canary in the coal mine for the climate crisis, and the canary is about to expire.”
The Immediate Impact on the Insurance Market
UC Berkeley News: Fires are still burning around Los Angeles and the devastation is being tallied. But given what we know, what might the broad effects be on the insurance market in California?
Dave Jones: Home insurers asked the insurance commissioner to adopt a set of regulatory changes last year and said that if those changes were adopted, they would start writing new insurance policies. The insurance commissioner, after a yearlong process, adopted all of the changes sought by the insurers. Specifically, the new regulations allow insurers to use forward-looking probabilistic models to determine the catastrophe load of the insurance rate and allow insurers to include the cost they pay for reinsurance, meaning their own insurance, in their rates.
The insurers also asked for — and got — relief from having to pay an assessment if claims made against the California FAIR Plan, which by state law has to write insurance for those who cannot obtain private insurance, exceed its ability to pay. Instead, that assessment will fall on all policyholders in the state.
Insurers, Jones believes, should follow through on their commitment to start writing new insurance again, particularly in high-risk wildfire areas. However, he anticipates that insurers will now seek even higher rate increases than previously planned, given the anticipated $10 to $20 billion in insured losses.
The Critical Role of Climate Change
Jones emphasizes that the LA wildfires were not unforeseen. “Global temperatures continue to rise, causing climate change, which in turn is driving more severe and extreme weather-related events,” he said. He argues that the wildfires should not be a basis for insurers to renege on their commitments but warns that they might nonetheless do so.
The Sustainability of the Current Insurance Approach
In the short and medium term, offering insurers more rate increases and reducing their costs might encourage them to resume writing insurance, Jones suggests. However, he stresses that in the long run, rate increases alone will not solve the problem.
Growing risks and losses from climate change-driven events will outrun rate increases and other regulatory changes granted to insurers in the longer run. – Dave Jones, UC Berkeley
Climate scientists warn that the continued reliance on fossil fuels will lead to more extreme weather events, resulting in more destruction and rising insurance losses, leading us toward an uninsurable future.
The California FAIR Plan: “Insurer of Last Resort”
The California FAIR (Fair Access to Insurance Requirements) Plan, also known as the “insurer of last resort,” has drawn significant attention. It is a statutorily mandated association of private insurers that provides coverage to those unable to obtain it elsewhere.
The FAIR Plan is not a state agency and is not taxpayer-funded. It can pay all claims, potentially through assessments on all California policyholders. The recent wildfires may exceed its current reserves, which stand at $200 million, along with $2.5 billion in reinsurance. If the FAIR Plan cannot cover the losses, state law allows it to charge all private insurers in the state.
California adopted Florida’s policy which allows assessments to be charged to state policyholders. The FAIR Plan can assess insurers for the first $1 billion of losses above its capacity, and then these insurers can collect half of that from their policyholders. Any losses above $1 billion could lead to assessing all policyholders in the state. All of this adds to the potential for substantial rate increases.
Lessons from Florida
Jones points to Florida as an example of how regulatory adjustments and rate rises may not be enough in the face of climate change. Despite regulatory changes requested by insurers, including the use of probabilistic models for rates and the inclusion of reinsurance costs, major insurers have left the state.
“Florida is Exhibit A that relaxing insurance regulations and rate increases are not going to be sufficient to outrun climate change,” Jones remarked.
Addressing Policyholder Concerns
UC Berkeley News: Many people have reported being dropped from their policies and were uninsured for this disaster. What financial resources should they be aware of?
Dave Jones: When your private home insurer declines to renew your home insurance policy, you should contact other insurers to see if they will write you insurance. If you cannot find a traditional admitted insurer to insure you, you should contact a surplus lines broker to see if they can find you private insurance in the largely unregulated surplus lines market. You can also obtain insurance from the FAIR Plan.
Limited resources exist for those who were uninsured, including FEMA grants and some federal loan programs, but these are typically not available for home rebuilding.
Implications for Renters
Renters insurance rates were expected to rise before the wildfires, and this trend will likely be amplified due to the fires. The wildfires might even lead to insurers curtailing home, business, and renter insurance.
In conclusion, the recent wildfires in Los Angeles have intensified the challenges facing California’s home insurance market. While regulatory changes and rate adjustments may provide some short-term relief, the fundamental issues driven by climate change and the lack of a quick transition away from fossil fuels persist. Policyholders and policymakers must prepare for a future where insurance availability and affordability will continue to be affected by climate change.
