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2025-01-12 06:09:12 UTC
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Permalinksections of the Los Angeles area will test Californias efforts to
stabilize the states insurance marketplace after many insurers stopped
issuing residential policies due to the high fire risk.
The wind-driven blazes that started Tuesday roared through neighborhoods
from the Pacific Coast inland to Pasadena and the Hollywood Hills. The
vast property damage in a disaster-prone state with high real estate
prices and an uncertain insurance landscape could make coverage more
expensive and even harder to find.
One area likely to feel the impact and encounter challenges rebuilding
is Pacific Palisades, an affluent community sandwiched between the Pacific
Ocean and the Santa Monica Mountains. This weeks wildfire there has been
named as the most destructive in the modern history of the city of Los
Angeles. Flames destroyed businesses, a library, cultural landmarks as
well as houses.
State authorities previously listed the Palisades as one of the five
Southern California areas with the highest concentration of potential
wildfire risks. The community also is among the areas most impacted by an
unavailability of insurance coverage.
When State Farm decided to discontinue coverage for 72,000 houses and
apartments in California last year, it dropped nearly 70% of its market
share in Pacific Palisades, according to the San Francisco Chronicle.
Heres what to know about Californias residential insurance crisis and
how the ongoing wildfires may further disrupt the policy market:
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Why does California have a home insurance crisis?
California has seen other major insurers pull back on property coverage in
the nations most populous state as climate change makes wildfires, floods
and windstorms more common and damaging.
Of the top 20 most destructive wildfires in state history, at least 15
occurred since 2015. The data did not include the Los Angeles area fires
this week.
In 2023, seven of the 12 largest insurance companies by market share in
California either paused or restricted issuing new policies in the state.
That has made it extremely difficult for homeowners in high-risk areas to
obtain or afford insurance.
What happens to residents who cant get regular home insurance?
California homeowners in wildfire-prone areas either go without insurance
or join the Fair Access to Insurance Requirements (FAIR) Plan, which the
state created as a last resort for homeowners who couldnt find insurance.
Many people purchase the FAIR Plan to satisfy their mortgage requirements,
but the policies only cover basic property damage and carry a $3 million
limit. Given the value of the real estate involved and the limited
coverage, FAIR Plan policyholders who lost homes in this weeks fires may
struggle to be made whole.
The policies can be very bare bones, with some options only covering the
actual cash value of what was lost rather than the true replacement costs,
said Amy Bach, executive director of the consumer advocacy group United
Policyholders.
The plan was designed to be a temporary solution, but more Californians
are relying on it than ever. The number of FAIR residential policies
issued in the state more than doubled between 2020 and 2024, reaching
nearly 452,000 policies.
Could claims from the LA fires push the FAIR Plan into insolvency?
Policies sold to FAIR customers primarily fund the plan, but insurers
would have to pay into the fund if it becomes insolvent or to keep it from
insolvency. Under a new state rule, insurers could ask the state to
approve rate increases to recoup the money spent on bailing out the FAIR
Plan.
FAIR Plan spokesperson Hilary McLean said it could take years to tally
total losses from the Los Angeles area fires. While its too soon for
reliable loss estimates, the FAIR Plan anticipates being able to pay out
claims from the wildfires, McLean said.
We are aware of misinformation being posted online regarding the FAIR
Plans ability to pay claims, she said in a statement. The FAIR Plan has
payment mechanisms in place, including reinsurance, to ensure all covered
claims are paid.
The plan has roughly $700 million in cash on hand and about $2.5 billion
in reinsurance, according to testimony given to California lawmakers last
year.
The mean home value in Pacific Palisades and its surrounding areas hovers
around $3.3 million, according to real estate company Redfin. Owners of
the most valuable properties probably are not relying on the FAIR Plan
because of the coverage limit, said Jamie Court, president of nonprofit
organization Consumer Watchdog.
The claims from the fires will be significant, Court said, but this is
not enough to put the industry out of business or the FAIR Plan out of
business.
On Thursday state lawmakers introduced a bill that would give the FAIR
Plan the ability to seek catastrophe bonds if it faces liquidity
challenges.
How has California responded to the insurance crisis?
In a new tactic, state officials undertook a yearlong overhaul to give
insurers more latitude to raise premiums in exchange for more issuing
policies in high-risk areas.
A new regulation that took effect this month allows insurers to consider
climate change when setting their prices. California previously did not
let insurance companies factor in current or future risks when deciding
how much to charge. Many companies cited the restriction as their reason
for retreating from the states insurance market.
The state is also in the final stage of approving a rule that would let
insurance companies pass on the costs of reinsurance to California
consumers. Insurance companies typically buy reinsurance or insurance
for themselves in case they face huge payouts from natural disasters or
catastrophic losses. California is the only state that doesnt already
allow the cost of reinsurance to be borne by policyholders.
The new rules have prompted Farmers, the second-largest insurer in the
state, to resume writing new policies for homeowners last month. Consumer
Watchdogs Court says the rules also could make it easier for insurers to
raise rates with little oversight.
How will the fires impact Californias insurance market?
Its premature to assess whether the wind-whipped fires and their
destruction will put a damper on Californias attempt to preserve home
insurance options for residents, said Denneile Ritter, a vice president
with the American Property Casualty Insurance Association, the largest
national trade association for home, auto and business insurers.
But higher homeowner premiums could be coming soon, RAND economist Lloyd
Dixon said. If insurers' models signal a potential increase of risk, then
youd expect to see the requests for premium increases by the insurers,
he said.
California Insurance Commissioner Ricardo Lara said Wednesday that the
newly enacted rules allowing climate change consideration in premiums will
help insurers accurately assess risks and set fair rates. The state is
also issuing a one-year moratorium prohibiting insurance companies from
dropping coverage in areas affected by fires.
Insurance companies are pledging their commitment to California, and we
will hold them accountable for the promises they have made, Lara said in
a statement.
https://www.wdbj7.com/2025/01/10/wildfires-will-alter-californias-
homeowners-insurance-landscape/