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In an Era of Record Wildfires, Insurers Have Made Fire Coverage Unaffordable

The breakdown of fire insurance systems doesn’t bode well for customers worldwide as global warming intensifies.

A firefighter moves a hose while trying to save houses on Mountain Hawk Drive as the Shady Fire burns in the Skyhawk area of Santa Rosa, California, on September 28, 2020.

Last week, California’s insurance commissioner, Ricardo Lara, announced that the state would stop insurance companies from dropping customers’ fire coverage in areas hit by 2021’s big wildfire infernos for one year. It builds on a regulatory change the commissioner pushed earlier this year to allow consumers to see their fire insurance “risk scores,” assigned them by insurers, and to force insurers to improve the scores of homeowners who undertake fire mitigation strategies on their properties.

The moratorium will give roughly 325,000 homeowners, spread across fire-hit regions of 22 counties, a temporary reprieve from what has become an annual nightmare in much of California: finding insurers willing to cover property in parts of the state increasingly vulnerable to fires as the region becomes a global epicenter of climate change impacts.

But the moratorium alone, and the risk score regulations, while providing breathing space, won’t fix a near-broken insurance system that is increasingly unable to financially navigate the climate change world of more frequent and more intense fires, floods, droughts and hurricanes. Throughout California — and indeed much of the American west — homeowners are struggling not only to find companies willing to insure them against fire, but to find companies who will do so at an affordable rate.

In October 2020, the office of California’s insurance regulator estimated that in 2019, upwards of 235,000 homeowners lost their fire insurance coverage after their insurers refused to renew their policies. That was a more than 30 percent increase on nonrenewals for homeowners compared to the previous year, although in 2018, the combined number of homeowners and businesses in the state who lost their fire insurance totaled roughly 350,000.

The numbers haven’t yet been released for 2020, but given that more than 4 million acres of Californian land burned during that year’s apocalyptic fires, and given that insurers have lost tens of billions of dollars as a result of California’s epic fires in recent years, it’s likely the pattern of nonrenewals has intensified. Up and down the Sierra Nevada and the range’s western foothills, entire communities either became involuntarily uninsured or faced staggering premium cost increases. And many businesses, especially in wine country, also found themselves shunned by insurance companies no longer willing to work in areas that are so at risk of destruction.

Locked out of the private insurance market, a growing number of Californians are having to fall back on the state-run FAIR Plan insurance pool, a last-ditch fire insurance option that costs a lot and comes with high deductibles, but is at least a little bit better than nothing. The Sacramento Bee has reported that hundreds of thousands of Californians now use this plan, which can cost homeowners many thousands of dollars a year to participate in — and which doesn’t cover any non-fire-related issues, meaning customers then also have to purchase separate home insurance policies from individual companies. Seventy-five thousand homeowners were pushed onto the FAIR Plan in 2019 alone.

Not everyone who loses private insurance qualifies, however: until Gov. Gavin Newsom signed a bill this past summer intended to address the problem, wineries, for example, were reclassified by FAIR as agricultural entities, a designation designed to exclude them from FAIR Plan eligibility. Many farmers are also excluded, as the plan wasn’t designed to cover the risk of a fire taking out large tracts of land. And even today, with the new legislation, crops and farm animal losses are still excluded from coverage. And many homeowners simply can’t afford the high premiums required to buy this last-ditch insurance. As a result, huge numbers of Californians have been left in limbo, living in areas at great risk of destruction from fire, yet unable to access coverage to protect their property and finances in the event of calamity.

And for the “lucky” ones who do still have fire insurance — sometimes as a result of insurers using artificial intelligence systems to calculate which properties are “insurable” even in high-risk fire zones — bills have sky-rocketed in recent years, in some cases by upwards of 300 percent, meaning that many homeowners in California’s mountains and foothills are now paying more for fire insurance than they are in property taxes. Even the FAIR Plan, which is intended as something of a safety net, has seen enormous year-on-year premium increases.

Last year, in the teeth of opposition from consumer advocates, legislators pushed to allow insurers to massively jack up their rates in fire-prone areas. It was presented by proponents as a better alternative than insurers simply pulling out of large swaths of the state completely, a risk that is, increasingly, a destabilizing element in the housing market. Opponents, however, argued that it would simply result in even higher insurance bills for consumers, without fundamentally altering the risks of bankruptcy by claims resulting from mega fires.

In the end, the legislative clock wound down without the bill, AB 2167, being passed and signed into law.

There is a better option. For two years now, progressive legislators have pushed bills in Sacramento that would require insurance companies to provide coverage, so long as homeowners make a good-faith effort to “harden” their properties against fire. For those same two years, however, the insurance industry has pushed back against the proposals.

California’s legislators must get behind these and other efforts to mandate insurers keep their customers affordably insured. In an era of brutal climate change emergencies, if insurance companies genuinely can’t stay solvent while maintaining reasonably priced coverage in fire zones, then the state ought to set up a subsidy system to both protect homeowners and also keep insurers afloat. It is, after all, a social good to maintain insurance protections that serve as a buffer against destitution for millions of people, especially in an era where billion-dollar disasters, be they wildfires or hurricanes and floods, are becoming the norm rather than the exception.

As with the federal bailout of the big car companies after the 2008 financial crisis, such climate change-era subsidies should come with nonnegotiable demands from the state: strict limits on profits; discounts for customers who put in the time and financial effort to “harden” their properties against fires; limits on the year-on-year premium increases that can be imposed, even in the most at-risk regions of the state; and insurance company investments in large-scale fire prevention strategies, as well as in climate change mitigation technologies. The consumer rights’ organization Consumer Watchdog has argued that insurers ought to be legally required to provide insurance services throughout the entire state, rather than cherry-picking which regions they insure, in order to be allowed to do business in California.

The breakdown of California’s fire insurance system is a red-flag warning about the global vulnerability of insurance markets, and their customers, as climate change intensifies and as “extreme” weather events become the new norm. Dropping hundreds of thousands of homeowners’ fire insurance policies as a way to maintain short-term profits is, in the long-run, deeply counter-productive; it undermines the viability of communities and puts huge numbers of people at risk of homelessness and destitution in the event of fires spreading into their communities. That might protect insurers’ bottom lines, but it sure as hell doesn’t protect ordinary people as they try to survive in a world made inhospitable by global warming.

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