California continues to face the risk of wildfires. Insurance companies think they have an answer.





A man searches through the remains of a burned-down home.

California’s wildfire problems are driven by decades of firefighting, climate change and a persistent desire to escape city life. | Jae C. Hong / AP Photo

SAN FRANCISCO – California fights to prevent forest fires from destroying communities every year. Now insurance companies are wondering if they can achieve what politicians can not.

Heads of state pour money into firefighting and clearing brushes from drought-dried forests. They have allowed utilities to cut off power on the most risky days. But they have not done much to deter residents from living in extreme fire areas. And they continue to allow development on the fringes of a state desperate for housing.

Go into the insurance industry, which says it can no longer afford to back home, which faces a high risk of burning up every year. It is pushing for a new model that will take into account future risks of climate change – an approach that California has been alone in resisting.

“People do not want to admit that the risk is rising and that in order to be resilient they have to change the way they do things,” says Nancy Watkins, a consultant at Milliman, which analyzes risks for insurance companies. .

California’s wildfire problems are driven by decades of firefighting, climate change and a persistent desire to escape city life. The state has seen some 40,000 structures destroyed since 2017 and the largest fires in the state’s history.

Many property owners are already struggling to find insurance companies that are willing to renew their policies. The state has also intervened and demands that they continue to cover vulnerable homeowners for the time being. But insurers dropped about 212,000 properties in California by 2020, and about 50,000 homeowners – many at the foot of the Sierra Nevada on the eastern side of the state – could not find another option in the private market.

This has led to an assessment of whether California should allow insurers to take into account future risks of climate change.

The industry is argues the state should let the market reflect the true risk. Insurance companies say the time is ripe to unlock a long-sought-after political tool: base rates on estimates of future fire damage rather than actual damage from the previous 20 years.

This would allow them to cover costs based on expected increases in fire damage, whether due to climate change, overgrown forests or people moving further into risk areas. Premiums would likely increase, but insurers would be more likely to stay in the state.

“Right now, our rules are just outdated,” said Rex Frazier, president of the Personal Insurance Federation of California. “What will give us long-term stability is a much more reliable method that can only be achieved by looking ahead.”

Eventually, there may also be pressure from mortgage lenders. The risks to property values ​​are already reflected in the state housing market: A study from Stanford University, recently submitted for publication, showed that homes in fire-prone areas valued about 7.5 percent less than homes in low-risk areas from 2015-18, an average difference of about $ 45,000.

“The people who should worry about this are the people who own the mortgage insurance,” said one of the study’s co-authors, Michael Wara, who served on a state commission investigating how to pay for the cost of wildfires. “Fannie and Freddie and the banks. They’re not players in this process yet, but I actually think that time is coming.”

Donnie Roberson, 69, has already gained an insight into what the future could look like for more homeowners in wildfire zones. He is trying to insure his suburban home in the mountains east of San Diego after Illinois-based Horace Mann Educators Corp. said it would drop him in March.

“Our zip code is 91901,” he said. “As soon as you tell them that, you’re done.”

He paid $ 950 a year and could now see his $ 4,000 tariff balloon annually just for catastrophically covering wildfires from California’s state-run, insurance company-run backup option, the FAIR Plan. Besides that, he would need another insurance company to cover non-wildfire damage for about $ 1,600 a year.

“I do not have $ 5,000- $ 6,000,” Roberson said. “I would have to take out a loan frame on my house to pay for insurance on my house.”

Consumer advocates are pushing back against insurance companies, claiming that their models are opaque and may run counter to state consumer protection laws.

“Giving them carte blanche to raise interest rates because they have some actuary justifying that it’s not consumer protection,” said Jamie Court, president of Consumer Watchdog, the group that wrote a 1988 law that made the state insurance regulator to a selected position and gave it authority over tariffs. “Companies want to be able to get the prices they want based on this disastrous modeling, and that’s not what Prop. 103 is about.”

It’s a long-running dispute in California. While all other states allow catastrophic modeling, California does not allow insurance companies to use it to estimate wildfire losses. Both State Insurance Commissioner Ricardo Lara and another Democratic challenger in 2022, State Assemblyman Marc Levine, are reluctant to change that stance.

Lara ordered one 2021 report recommending he consider it, but he still makes reservations. “My concern is whether these models will be used to discriminate [between] who gets insurance and who does not? “he said.” Or do these models increase insurance costs already in communities that are disproportionately affected by wildfires? “

Levine did not directly answer a question about allowing disaster models, but he said he would not be motivated by the industry.

“For me, it’s how we make sure we have a consumer-oriented insurance commissioner who makes sure Californians have the coverage they need – not a commissioner who is responsive to what the industry wants,” he said.

Market experts and some property owners agree with insurance companies that projection-based modeling can help the state respond to the rising risks. “Given what we know about climate science and this danger, we should have forward-looking prices in California,” Wara said. “I do not think there is any question.”

The magnitude of the problem is not yet close to the problems of other natural disasters such as floods and hurricanes. And Lara has taken some steps to entice insurance companies to stay: His agency has approved a constant series of modest premium increases for some of the largest insurance companies, which have raised interest rates by as much as 14 percent in risk areas – enough to stop the emigration of Insurance companies without pricing property owners. He also got some companies to give discounts to property owners who upgrade their roofs or clear brushes around their homes. California’s situation is now “stable but fragile,” Wara said.

However, if the most risky property owners continue to be forced to the last resort plan, it may reflect the problems faced by the debt-ridden national flood insurance program.

Damage from an expensive fire could flood the plan’s reserves and require taxpayers to step in, as they have been supplementing FEMA’s insufficiently low flood insurance rates for decades. The National Flood Insurance Program finally began raising premiums in 2021 objections from coastal legislators in both parties.

Lara proposes to expand the FAIR plan by requiring it to offer full coverage, not just for wildfires, while Levine wants to establish a state-funded reinsurance fund to compensate insurers for losses of over $ 100 million. Both ideas would spread the cost over a wider pool of payers.

Lara also wants insurance companies to give more discounts to property owners who reduce their risks. But experts said he must first let the insurers earn enough to afford these discounts.

Florida has already seen this experiment – originally prompted by Hurricane Andrew in 1992 and intensified by Hurricanes Katrina, Rita and Wilma.

Elected officials froze insurance rates, insurers withdrew from the state and the state-subsidized plan increased in size, jeopardizing the state’s credit rating. Regulators eventually agreed to let insurers raise premiums and use forward-looking models to take into account the worst-case scenarios.

“Do not allow insurers to gradually adjust rates to where they need to be to reflect the risks in the books; it’s Economics 101 what will happen next, and that’s what happened in Florida,” said Bob Hartwig, director of Risk and Uncertainty Management Center at the University of South Carolina Business School.

Florida now has a commission made up of actuaries, consumer advocates, meteorologists and other experts who set standards for industry hurricane models, and consumer advocates have access to the assumptions underlying them.

California, however, may be hampered by its policies.

Despite historic disasters in recent years, heads of state remain reluctant to tell residents where they can and cannot live. Governor Gavin Newsom vetoed a bill by 2020, it would have restricted new housing in the most risky areas, arguing that it could exacerbate the state’s housing shortage.

It is also one of the only ones 12 states must choose its insurance regulator, and Lara has been attacked by consumer advocates for accepting contributions from insurance companies and meeting with industry lobbyists. Levine highlights Lara’s mistakes and promises to “stand up to insurance companies on behalf of consumers.” None of them seem to be inclined to let the insurance industry use catastrophic modeling.

“If you run for office as an insurance commissioner, the only good option is to stand firm as a consumer advocate and appear to take the industry by storm,” said Darry Sragow, a longtime Democratic strategist who advised the state’s first elected commissioner, now – Rep. John Garamendi. “But then the problem is, what do you do with good politics?”

While Florida still suffers from massive and rising damage from hurricanes, insurance is available – albeit more expensive – and is bound by stricter building regulations, with incentives to go beyond the standards of installing the most rugged doors and windows.

“Absolutely nothing will deter people from moving to some of the most disaster-prone corners of the United States,” Hartwig said.

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