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2025-01-12 06:11:12 UTC
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Permalinkblazes like the ones currently devouring parts of Los Angeles could still
drive away home insurers
This article by Grist is published here as part of the global journalism
collaboration Covering Climate Now. It has been edited to conform with
Corporate Knights style.
On Tuesday, after a ferocious Santa Ana windstorm blew through Southern
California, a severe brush fire broke out in the wealthy Pacific Palisades
neighborhood of Los Angeles, burning 1,000 structures and forcing tens of
thousands of residents to evacuate as of Wednesday afternoon. Another
large brush fire broke out near Pasadena around the same time, killing at
least two people. Together the two blazes threatened some of the most
valuable homes and businesses in the United States. The damage from the
Palisades Fire alone could exceed US$10 billion, according to a
preliminary estimate from J.P. Morgan.
If this estimate holds true, it will test insurers commitment to a market
that has been teetering on the verge of collapse for the better part of a
decade now. Over the past five years, California has become a poster child
for what climate-fueled weather disasters can do to a states home
insurance market. Following a rash of historic wildfires in 2017 and 2018,
insurance companies have fled the state, dropped tens of thousands of
customers in flammable areas, and raised prices by double-digit
percentages.
A requirement to expand insurance coverage
Until recently, elected officials have taken few major steps to address
the crisis. But late last month, after more than a year of drafting,
Californias insurance commissioner unveiled a set of reforms that he
claimed will bring companies back into the fold as they take effect this
year.
This is a historic moment for California, said Ricardo Lara, the states
insurance commissioner, when he revealed the rules in December. With
input from thousands of residents throughout California, this reform
balances protecting consumers with the need to strengthen our market
against climate risks.
The rules come after months of debate among state insurance officials,
lawmakers, insurance companies, and consumer advocates. The biggest change
is that California will now require many insurance companies to do more
business in what the state calls distressed areas, the fire-prone
scrubland and mountain regions where insurers are now hiking prices and
dropping customers.
Companies will soon have to ensure that their market share in these areas
is at least 85 percent of their total statewide market share in other
words, if a company controls 10 percent of the states insurance market,
it must control at least 8.5 percent of the market in fire-prone areas.
This mandate should push big companies like State Farm and Allstate to
pick up customers theyve dropped in flammable regions like the
mountainous north of the state. Some companies have already begun to offer
new policies in burned areas in anticipation of the states new rules: the
insurance company Mercury announced last week that it will be the first
insurance company in the state to offer new policies in Paradise,
California, which was destroyed in the catastrophic 2018 Camp Fire. The
move recognizes the towns work to mitigate future fires by clearing trees
and hardening homes.
Expanded coverage comes with a high cost
The requirement to expand coverage, coupled with recent announcements from
companies like Mercury, should give consumers hope that competition and
options will be returning, said Amy Bach, the head of insurance customer
advocacy group United Policyholders, in a statement.
In return for this added coverage, the state is making a few big tweaks
that will allow insurers to pass on the price of fire risk to their
customers. California is the only state in the country that doesnt allow
insurance companies to use forward-looking catastrophe models when they
set prices. It also prohibits companies from factoring in the rising costs
of reinsurance, the insurance purchased by insurance companies to ensure
theyre able to pay out big claims.
These two restrictions have kept prices artificially low for years, and
also prevented insurers from planning for climate change impacts, creating
a de facto subsidy for homeowners in risky areas. But these protections
were removed in an attempt to coax insurers back into the market.
This addresses the major stumbling blocks that companies have been
identifying for a decade, so thats a positive, said Rex Frazier, the
president of the Personal Insurance Federation of California, the states
leading insurance trade group.
This trade-off has some residents in fire-prone areas worried. Insurance
companies might now have to offer more policies in flammable zones, but
they also have more latitude to increase prices.
Im not optimistic that it will improve the experience of the consumer,
as the insurers can now pass certain costs onto consumers, which Im
expecting will result in higher premiums, said Jason Lloyd, who moved to
mountainous Lake County last spring. He and his wife came to the area
because they wanted to be closer to his wifes family, but when they made
an offer on a home, they learned that they would have to pay more than
$8,000 a year for insurance, or else go to the California FAIR Plan, a
state-run insurance program that offers minimal coverage.
Lloyd and his wife later bought another home in Hidden Valley Lake, a town
that has taken ambitious steps to reduce flammable vegetation, but their
insurance premium is still more than $4,500 a year, more than triple what
it was on their last home in Kansas. Lloyd is worried that his insurance
company will hike his price further under the new rules.
Making a bargain with the insurance industry
Other states across the West such as Colorado and Oregon are also seeing
insurance coverage gaps emerge after big wildfires, though their problems
are less acute than those in the Golden State. In Colorado, for instance,
officials just recently established a state fire insurance backstop like
Californias FAIR Plan, since its only in the past few years that
customers there have been dropped en masse.
Californias grand bargain with the insurance industry provides a
blueprint for those other states: If you want to address coverage gaps,
you need to give insurers broader authority to set prices.
Even this might not be enough. The past few years have seen a reprieve
from major wildfires like the ones that struck in 2017 and 2018, but this
weeks blazes in the Los Angeles area could cause billions of dollars of
damage, on par with an event like the Camp Fire.
Joel Laucher, a former regulator and fire insurance expert at the consumer
advocacy organization United Policyholders, said that the damage from the
Los Angeles blazes could lead to further price hikes and more availability
gaps.
These are going to be major losses, certainly, he told Grist. Certain
areas are definitely going to have new challenges, to the degree that
insurers are going to be able to charge to the rate they believe those
areas deserve to pay. Laucher said that insurance companies may not
decline to renew as many policies as they might have under previous state
rules, but they could still avoid selling policies in some of the affected
areas.
Frazier, of the insurance trade group, voiced similar concerns. He said
that another round of monster blazes on the scale of 2017 and 2018 could
drive the insurance industry away from the state once again, despite the
commissioners reforms.
If we were to have a couple more unprecedented years, all bets are off,
he told Grist.
https://www.corporateknights.com/category-climate/california-home-
insurance-wildfire/