California’s insurance crisis is a warning for America (original) (raw)

The flames ripping through parts of Los Angeles and neighboring counties for the past week have been an unprecedented disaster, and persistent Santa Ana winds threaten to keep the smoke and horror going. At least 24 people have died and more than 40,000 acres have burned. Many residents will soon return to leveled neighborhoods, having watched via home security cameras or news feeds as the inferno engulfed their homes and businesses.

As the evacuees look ahead to rebuilding, they are seeing the limits of the region’s faulty insurance system — and the need to better protect homes from natural disasters made worse and more frequent by climate change.

Early estimates project that the fires will be among the costliest and most destructive in the country’s history, with losses so far between 135billionand135 billion and 135billionand150 billion. Analysts attribute the scale of damage to a combination of factors: the breadth, duration and intensity of the fires in densely populated neighborhoods of relatively expensive homes.

How will property owners pay for this? Insurance is offering inadequate answers. In recent years, many people living in parts of the state’s wildfire-prone areas have lost their home insurance coverage. Some insurers have stopped doing business in the state altogether, citing financial risks from too-frequent wildfires. Last March, State Farm General, the state’s largest insurer, declined to renew 30,000 policies — including 1,626 in the Pacific Palisades neighborhood that was devastated by the fires. Allstate, Tokio Marine America Insurance Co. and others also have left California’s home insurance market.

After these cancellations, many residents across the state risked going without insurance. Others turned to FAIR, California’s public stopgap insurance program, which provides minimal coverage. In the past four years, enrollment in FAIR has more than doubled. FAIR has access to only 700millionandabout700 million and about 700millionandabout2.5 billion in reinsurance. But the program is exposed to nearly $6 billion of assets at risk in the Pacific Palisades alone.

Follow Editorial Board

Though the agency claims to have mechanisms in place to cover the recent fires, there’s a real hazard the program could become insolvent. It would be a calamity for the state, where climate change has increased the frequency and severity of wildfires. Fifteen of California’s 20 most destructive wildfires have come in the past decade. Making matters worse, if or when FAIR falls short of funds, the remaining liability will be turned over to the state’s private insurers, which can eventually pass these costs along to all their insured homeowners in the state through rate hikes.

The insurance crisis has been made worse by a 1988 state law, Proposition 103, that has held rates artificially low. The policy undercut a key purpose of insurance — signaling financial risk — by preventing insurers from raising premiums to account for reinsurance costs or to adhere to forward-looking catastrophe models (not commonly used when the law was passed). These restrictions limited insurers’ options at a time of heightened fire danger and helped drive companies out of California. The state has since undertaken a series of reforms to lure them back.

About a week before the Palisades fire, California’s insurance commissioner, Ricardo Lara, announced rule changes that require insurers to cover more wildfire-prone areas, but with a concession: The industry could factor reinsurance and modern catastrophe modeling into their rates, enabling them to share the rising costs of wildfires with customers. But insurers still must get the state’s approval for any rate increases.

Higher premiums will be painful for homeowners, but accuraterisk assessments are essential if markets are to realistically understand the dangers homeowners face. State lawmakers have to face the unpleasant reality that the cost of home insurance — and subsequently homeownership — will go up (exacerbating the ongoing affordability problem) because insurers will need even more latitude to operate without losses in the state.

Insurers and homeowners also could use the state’s and cities’ help to fireproof houses and buildings. The state can provide assistance with replacing roofs and siding, for example, and installing ember-resistant vents. It can also enforce requirements for buffer zones around properties to better contain fires. Cities, for their part, can shore up and enforce building codes to ensure that all homes are made fire-resistant.

Such steps can make a difference for the future. After the 2018 Camp Fire decimated Paradise, California, the town’s efforts to rebuild with a focus on fire resistance drew wary insurers back.

L.A.’s nightmare should serve as a warning to other states: Climate change is crushing insurance markets, and the solution is not to artificially lower premiums or rely on public options. States must act to protect homeowners from hazards — before the next natural disaster strikes.