SAN FRANCISCO — California is struggling to prevent wildfires from decimating communities each year. Now insurers wonder if they can accomplish what politicians can’t.
State leaders are pouring money into firefighting and clearing brush from drought-parched forests. They’ve allowed utilities to cut power on the riskiest days. But they’ve done little to discourage residents from living in extreme fire areas. And they’ve continued to allow development on the outskirts in a state desperate for housing.
Enter the insurance industry, which says it can no longer afford to back homes facing a high risk of burning up each year. It’s pushing for a new model that would account for future climate change risks — an approach that California has been alone in resisting.
"People don't want to admit that the risk is going up and that in order to be resilient, they have to change how they're doing things," said Nancy Watkins, a consultant with the firm Milliman who analyzes risks for insurance companies.
California’s wildfire problems are fueled by decades of fire suppression, climate change and a persistent desire to escape city life. The state has seen some 40,000 structures destroyed since 2017 and the largest conflagrations in state history.
Many property owners are already struggling to find insurers willing to renew their policies. The state also has intervened, demanding that they continue covering at-risk homeowners for the time being. But insurers dropped about 212,000 California properties in 2020, and about 50,000 homeowners — many in the Sierra Nevada foothills on the eastern side of the state — couldn't find another option on the private market.
That has led to a reckoning over whether California should allow insurers to account for future climate change risks.
The industry is arguing the state should let the market reflect the true risk. Insurers say the time is ripe to unlock a long-sought policy tool: Basing rates on estimates of fire damages to come, rather than actual damages from the previous 20 years.
That would let them recover costs based on anticipated increases in fire damages, whether from climate change, overgrown forests or people moving further into risky areas. Premiums would likely go up, but insurers would be more likely to stay in the state.
"Right now our rules are just antiquated," said Rex Frazier, president of the Personal Insurance Federation of California. "What's going to give us long-term stability is a much more dependable method that can only be had by looking forward."
Eventually, pressure could come from mortgage lenders, too. The risks to property values are already being reflected in the state's housing market: A Stanford University study recently submitted for publication found that homes in fire-prone areas appreciated about 7.5 percent less than homes in low-risk areas from 2015-18, an average difference of about $45,000.
"The people that 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 examining how to pay for the costs of wildfires. "Fannie and Freddie and the banks. They are not players in this process yet, but I actually think that time will come."
Donnie Roberson, 69, has already gotten a glimpse of what the future could look like for more homeowners in wildfire zones. He’s trying to insure his suburban residence in the mountains east of San Diego after Illinois-based Horace Mann Educators Corp. said it will drop him in March.
"Our ZIP is 91901," he said. "As soon as you tell them that, you're done."
He was paying $950 a year and now could see his rate balloon to $4,000 annually just for catastrophic wildfire coverage from California’s state-mandated, insurer-run backup option, the FAIR Plan. Besides that, he would need another insurer to cover non-wildfire damages for about $1,600 a year.
"I don't have $5,000-$6,000,” Roberson said. “I'd have to take a home equity line of credit out on my house to pay for insurance on my house."
Consumer advocates are pushing back against insurers, arguing their models are opaque and could run afoul of the state’s consumer-protection laws.
"To give them carte blanche to raise rates because they have some actuary that justifies it is not consumer protection," said Jamie Court, president of Consumer Watchdog, the group that wrote a 1988 law that made the state’s insurance regulator an elected position and gave it authority over rates. "The companies want to be able to get whatever rates they want based on this catastrophic modeling, and that's not what Prop. 103's about."
It’s a long-running dispute in California. While all other states allow catastrophic modeling, California doesn’t allow insurers to use it to estimate wildfire losses. Both state Insurance Commissioner Ricardo Lara, and a fellow Democratic challenger in 2022, state Assemblymember Marc Levine, are reluctant to change that position.
Lara commissioned a 2021 report that recommends he consider it, but he still harbors reservations. "My concern is, are these models going to be used to discriminate [between] who gets insurance and who doesn't?" he said. "Or do these models increase the cost of insurance already on communities that are disproportionately affected by wildfires?"
Levine didn't respond directly to a question on allowing catastrophe models, but he said he wouldn't be motivated by the industry.
"For me, it's how do we make sure that we have a consumer-oriented insurance commissioner who's making sure that Californians have the coverage that they need — not a commissioner who's responsive to what the industry wants," he said.
Market experts and some property owners agree with insurers that projection-based modeling could help the state respond to the rising risks. "Given what we know about climate science and this peril, we should have forward-looking rates in California," Wara said. "I don't think there's any question."
The magnitude of the problem isn't yet anywhere near the problems posed by other natural disasters like floods and hurricanes. And Lara has taken some steps to entice insurers to stay: His agency has been approving a steady series of modest premium increases for some of the biggest insurers that have hiked rates as much as 14 percent in risky areas — enough to stanch the exodus of insurers without pricing out property owners. He also got some companies to give discounts for property owners who upgrade their roofs or clear brush around their homes. California's situation is now "stable but fragile," Wara said.
But if the riskiest property owners keep being forced onto the last-resort plan, it could mirror the woes faced by the debt-ridden national flood insurance program.
Damages from an expensive fire could swamp the plan’s reserves and require taxpayers to step in, as they have for decades to supplement FEMA’s inadequately low flood insurance rates. The National Flood Insurance Program finally began raising premiums in 2021 over objections from coastal lawmakers in both parties.
Lara is proposing to expand the FAIR Plan by requiring it to offer full coverage, not just for wildfires, while Levine wants to establish a state-backed reinsurance fund to compensate insurers for losses over $100 million. Both ideas would distribute the costs across a wider pool of payers.
Lara also wants insurers to give more discounts to property owners who lower their risks. But experts said he first needs to let insurers make enough of a profit that they can afford to give those discounts.
Florida has already seen this experiment — initially prompted by Hurricane Andrew in 1992 and amplified by hurricanes Katrina, Rita and Wilma.
Elected officials froze insurance rates, insurers pulled out of the state and the state-backed plan ballooned in size, jeopardizing the state's credit rating. Regulators eventually agreed to let insurers increase premiums and use forward-looking models to factor in worst-case scenarios.
“Not allowing insurers to gradually adjust rates to where they need to be to reflect the risks on the books, it’s Economics 101 what will happen next, and that's what happened in Florida,” said Bob Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina's business school.
Florida now has a commission of actuaries, consumer advocates, meteorologists and other experts that sets standards for the industry’s hurricane models, and consumer advocates have access to the assumptions underpinning them.
California may be hamstrung by its politics, however.
Despite historic calamities in recent years, state leaders remain hesitant to tell residents where they can and cannot live. Gov. Gavin Newsom vetoed a bill in 2020 that would have limited new housing in the riskiest areas, arguing it could exacerbate the state's housing shortage.
It's also one of only 12 states to elect its insurance regulator, and Lara has come under attack from consumer advocates for accepting contributions from insurance companies and meeting with industry lobbyists. Levine is highlighting Lara's missteps and pledging to "stand up to insurance companies on behalf of consumers." Neither seems inclined to let the insurance industry use catastrophic modeling.
"If you're running for insurance commissioner, the only good option is to stand firm as a consumer advocate and appear to be taking the industry head on," 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 about good policy?"
While Florida still suffers massive and increasing damages from hurricanes, insurance is available — albeit more expensive — and is tied to more-stringent building codes, with incentives for going beyond the standards to install the sturdiest 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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