This story was originally published by grist and is reproduced here as part thereof Climate Desk cooperation
Tuesday, after a fierce Santa Ana storm swept through Southern California, a deadly brush fire The rich spread to the Pacific Palisades Areas around Los Angeles, at least, are burning 1,000 structures and forcing hundreds of thousands of residents to evacuate as of Thursday morning. Another big brush fire Spread near Pasadena At least two people were killed around the same time. Two wildfires simultaneously threaten the most valuable homes and businesses in the United States. Damages from the Palisades fire alone could exceed $10 billion, according to one JP Morgan’s preliminary estimate.
If this assumption holds true, it will test insurers’ commitment to a market that has been on the brink of collapse for the better part of a decade. Over the past five years, California has become a poster child for what climate-fueled weather disasters can do to a state’s home insurance market. Following a rash of historic fires2017And2018There are insurance companiesfled the stateexcept Thousands of customersIn combustible areas, and prices raised byPercentage of double digits.
Until recently, elected officials have taken few major steps to address the crisis. But late last month, after more than a year of drafting, California’s insurance commissioner unveiled a set of reforms that he claims will bring companies back into the fold as they take effect this year.
“This is a historic moment for California,” state Insurance Commissioner Ricardo Lara said, when he Published the rules in December. “With input from thousands of residents across California, this reform balances consumer protection with the need to strengthen our markets against climate risks.”
The rules come after a debate between 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,” fire-prone scrubland and mountain areas where insurers are now raising prices and dropping customers. Companies will soon have to ensure that their market share in these regions is at least 85 percent of their total statewide market share — in other words, if a company controls 10 percent of a state’s insurance market, it must control at least 8.5 percent. Market in fire prone areas.
The order would force large companies like State Farm and Allstate to pick up customers dumped in flammable areas like the state’s northern hills. Some companies have already started offering new policies in burn areas in anticipation of the state’s new rules: Insurance company Mercuryannounced last weekIt will be the first insurance company in the state to offer the new policy in Paradise, California, which was devastated by the 2018 wildfires. The move recognizes the city’s workPut out future firesClears the tree and strengthens the house.
With recent announcements by companies like Mercury about the need to expand coverage, “consumers should expect competition and options to return,” said Amy Bach, head of the Insurance Consumer Advocacy Group. United Policyholdersin a statement.
In exchange for this added coverage, the state is making some major changes that allow insurers to pass the cost of fire risk on to their customers. California is the only state in the nation that does not allow insurance companies to use forward-looking “catastrophe models” when setting rates. It also prohibits companies from factoring in the rising cost of reinsurance, the insurance bought by insurance companies to enable them to pay large claims.
These two restrictions have kept prices artificially low for years, and prevented insurers from planning for the effects of climate change, creating a de facto subsidy for homeowners in at-risk areas.
“This is the major stumbling block that companies have been identifying for a decade, so that’s a positive thing,” said Rex Frazier, president of the Private Insurance Federation of California, the state’s leading insurance trade group.
Some residents of the fire-prone area are worried because of this trade closure. Insurance companies may now have to offer more policies in flammable areas, but they have more latitude to raise prices.
“I’m not optimistic that this will improve the consumer experience, because insurers can now pass some of the cost on to consumers, which I expect will result in higher premiums,” said Jason Lloyd, who moved to mountainous Lake County last spring because he and his wife came to the area. They wanted to be closer to his wife’s family, but when they made an offer on a house, they learned they would have to pay more than $8,000 a year for insurance, or else move there. California FAIR Plan, a state-run insurance program that offers minimum 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 premiums are still more than $4,500 a year, three times what they were in their last home in Kansas. Lloyd’s worried that his insurance company would raise his prices even further under the new rules.
Other western states, such as Colorado and Oregon, also see insurance coverage gaps after major wildfires, although their problems are less severe than in the Golden State. In Colorado, for example, officials recently established oneState fire insurance backstopLike California’s FAIR plan, since there have been massive customer dropouts over the past few years. California’s grand bargain with the insurance industry provides a blueprint for those other states: If you want to address coverage gaps, you have to give insurers greater authority to set prices.
Even this may not be enough. The past few years have been spared major wildfires, such as 2017 and 2018, but this week’s wildfires in the Los Angeles area could cause billions of dollars in damage, on par with events like campfires.
Joel Laucher, a former regulator and fire insurance expert at the consumer advocacy organization United Policyholders, said damage from the Los Angeles fires could lead to more price increases and more availability gaps.
“These are definitely going to be big losses,” he told Grist. “Certain areas are certainly going to face new challenges, to the extent that insurers are able to charge the rates that they believe these areas deserve to pay.” Laucher said insurance companies can’t refuse to renew as many policies as under previous state rules, but they can still avoid selling policies in some affected areas.
Insurance trade group Frazier expressed similar concerns. He said another monster fire on the scale of 2017 and 2018 could drive the insurance industry away from the state again, despite the commissioners’ reforms.
“If we have a few more phenomenal years, all bets are off,” he told Grist.
