California continues to face wildfire risks. Insurers think they have an answer.


California’s forest fire problems are fueled by decades of fire fighting, climate change, and an ongoing desire to escape city life. | Jae C. Hong / AP Photo

SAN FRANCISCO – California struggles every year to keep wildfires from decimating communities. Now insurers are wondering whether they can do what politicians cannot.

Heads of state invest money in fighting fires and clearing forests that have been parched by the drought. They allowed the utilities to turn off the electricity on the riskiest days. But they have done little to discourage residents from living in extreme fire areas. And they have continued to allow development on the outskirts of a state desperately looking for housing.

Get into the insurance industry that can no longer afford to support homes that are at high risk of being burned every year. It is pushing for a new model that would consider future risks from climate change – an approach that California alone resisted.

“People don’t want to admit that risk increases and that in order to be resilient they have to change the way they operate,” said Nancy Watkins, a consultant at Milliman, who analyzes risk for insurance companies.

California’s forest fire problems are fueled by decades of fire fighting, climate change, and an ongoing desire to escape city life. The state has seen some 40,000 structures destroyed since 2017 and the biggest fires in the history of the state.

Many property owners are struggling to find insurers willing to renew their policies. The state has also intervened and demanded that vulnerable homeowners continue to be covered for the time being. But insurers dropped about 212,000 California homes in 2020, and some 50,000 homeowners – many in the Sierra Nevada foothills to the east of the state – couldn’t find any other option in the private market.

This has led to a reflection on whether California should allow insurers to account for future climate change risks.

The industry is argue the state should let the market reflect real risk. Insurers say the time is ripe to unleash a long-awaited policy tool: rates are based on estimates of upcoming fire damage, not actual damage over the past 20 years.

In this way, they could cover the costs of the expected increase in fire damage, be it from climate change, overgrown forests or the migration of people to risk areas. Premiums would likely go up, but insurers would be more likely to stay in the state.

“Right now our rules are just out of date,” 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 got by looking ahead.”

Finally, pressure could also come from mortgage lenders. The risks to property values ​​are already being reflected in the state’s housing market: a recently published study by Stanford University found that homes in fire-prone areas were on average 7.5 percent less valued than homes in areas from 2015-18 low risk difference of about $ 45,000.

“The people who should be concerned 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 forest fire costs. “Fannie and Freddie and the banks. They are not players in this process yet, but I actually think the time will come.”

Donnie Roberson, 69, already got a glimpse of what the future might look like for more homeowners in forest fire areas. He is trying to insure his suburban home in the mountains east of San Diego after Illinois-based Horace Mann Educators Corp. announced plans to drop it 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 has now been able to increase his rate to $ 4,000 a year just for catastrophic forest fire coverage through the state-mandated, insurer-operated backup option, the FAIR plan. Plus, he’d need another insurer to cover damage not caused by forest fires for about $ 1,600 a year.

“I don’t have $ 5,000 to $ 6,000,” said Roberson. “I would have to take out a home equity line of credit to pay for my home insurance.”

Consumer advocates are fighting back against insurers, arguing that their models are opaque and could violate the state’s consumer protection laws.

“Giving them carte blanche to raise tariffs because they have an actuary to justify it is not consumer protection,” said Jamie Court, president of Consumer Watchdog, the group that enacted law in 1988 that the state insurance regulator promises an elected position, and there was authority over prices. “Businesses want to be able to get all the rates they want based on this disastrous modeling, and that’s not what Prop. 103 is about.”

It’s been a longstanding argument in California. While all other states allow disaster models, California doesn’t allow insurers to use them to estimate forest fires. Both state insurance commissioner Ricardo Lara and another democratic challenger in 2022, the national assembly MP Marc Levine, are reluctant to change this position.

Lara instructs a 2021 report advising him to consider it, but he still has reservations. “My concern is, are these models being used to discriminate? [between] Who gets insurance and who doesn’t? “He said.” Or are these models already increasing insurance costs in communities that are disproportionately affected by forest fires? “

Levine didn’t respond directly to a question about disaster model approval, but said he would not be motivated by the industry.

“For me, it’s how we make sure we have a consumer-centric insurance commissioner who makes sure Californians have the coverage they need – not a commissioner who cater to the needs of the industry,” he said.

Market experts and some property owners agree with insurers that forecast-based modeling could help the state respond to the rising risks. “Given what we know about climate science and this threat, we should have forward-looking rates in California,” Wara said. “I don’t think there is a question.”

The scale of the problem is not nearly as great as that of other natural disasters such as floods and cyclones. And Lara has taken a few steps to get insurers to stay: his agency has approved a steady series of modest premium increases for some of the largest insurers that have raised tariffs in risk areas by as much as 14 percent – enough to keep insurers churning stop without pricing out the property owners. He also got some companies to give discounts to property owners who upgrade their roofs or clean their homes. The situation in California is now “stable but fragile,” said Wara.

But if the riskiest homeowners continue to be forced onto the last resort, it could reflect the hardship facing the debt-ridden national flood insurance program.

Damage from an expensive fire could flood the plan’s reserves, forcing taxpayers to step in, as they have for decades to supplement FEMA’s inadequately low flood insurance tariffs. The National Flood Insurance Program finally started raising premiums in 2021 Objections from coastal lawmakers at both parties.

Lara suggests expanding the FAIR plan by requiring it to provide full coverage, not just for forest fires, while Levine wants to set up a government-backed reinsurance fund to reimburse insurers for losses in excess of $ 100 million. Both ideas would distribute the costs to a larger group of cost bearers.

Lara also wants insurers to give more discounts to property owners who lower their risks. However, experts said that he must first allow insurers to generate sufficient profit that they can afford to offer these discounts.

Florida has already experienced this experiment – initially triggered by Hurricane Andrew in 1992 and exacerbated by Hurricanes Katrina, Rita and Wilma.

Elected officials froze insurance tariffs, insurers withdrew from the state, and the state-sponsored plan exploded, threatening the state’s creditworthiness. Regulators, finally agreed that insurers would increase premiums and use forward-looking models to accommodate worst-case scenarios.

“Insurers are not being allowed to gradually adjust tariffs to what is necessary to reflect risk on the books at the University of South Carolina Business School.

Florida now has a commission of actuaries, consumer advocates, weather forecasters, and other experts that sets standards for the industry’s hurricane models, and consumer advocates have access to the assumptions that underlie them.

California, however, could be paralyzed by its politics.

Despite historical disasters in recent years, heads of state are reluctant to tell residents where they can and cannot live. Governor Gavin Newsom vetoed an invoice In 2020 this would have limited new housing construction in the most risky areas, arguing that it could exacerbate the state’s housing shortage.

It is also one of only 12 states choose their insurance regulator, and Lara has been targeted by consumer advocates for accepting contributions from insurance companies and meeting with industry lobbyists. Levine highlights Lara’s missteps and promises to “stand up against insurance companies on behalf of consumers.” Neither seem inclined to leave the insurance industry to use catastrophe models.

“If you’re running for insurance commissioner, the only good option is to stand your ground as a consumer advocate and fight the industry head-on,” said Darry Sragow, a longtime democratic strategist who now advised the state’s first elected commissioner-Rep. John Garamendi. “But then the problem is, what are you doing for good politics?”

While Florida is still suffering massive and increasing damage from hurricanes, insurance is out there – albeit more expensive – and tied to stricter building codes, with incentives to go beyond standards and install the most sturdy doors and windows.

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

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