This Years Wildfires Intensify Insurance Crisis for California Homeowners
Overall Summary
1. Recent wildfires:
- Three wildfires have burned over 100,000 acres in Southern California, forcing evacuations and prompting emergency declarations.
- The Line Fire (37,000+ acres), Bridge Fire (50,000+ acres), and Airport Fire (23,000+ acres) are currently active.
2. Insurance crisis:
- Major insurance companies like State Farm and Allstate have stopped writing new policies in California.
- State Farm announced it would not renew 72,000 existing policies.
- This has led to reduced availability and affordability of homeowners insurance, especially in high-risk areas.
3. Causes of the crisis:
- Increasing climate-related risks, particularly wildfires
- Rising costs of construction and repairs
- Regulatory constraints on raising insurance rates
- Information asymmetries between insurers in assessing risks
4. Regulatory response:
- Insurance Commissioner Ricardo Lara is introducing new regulations to address the crisis.
- Key changes include streamlining rate reviews and allowing insurers to use catastrophe modeling for setting rates.
- The regulations aim to balance affordability with availability of insurance.
5. Research findings:
- A UC Berkeley study found evidence of the "winner's curse" phenomenon, where insurers with less granular risk information tend to overprice policies.
- More detailed risk assessment could potentially improve both affordability and availability of insurance.
6. Public input:
- The California Department of Insurance is seeking public input on the proposed regulations.
- A virtual public hearing is scheduled for September 17, 2024.
7. Implications:
- The crisis highlights the need for updated insurance models that account for climate change and mitigation efforts.
- There's a push for insurers to consider community-level and landscape-scale wildfire mitigation efforts in their risk assessments.
- The situation underscores the challenges of balancing consumer protection with insurer sustainability in high-risk areas.
Wildfires in Past Week Cast New Light on Insurance Crisis for California Homeowners - Times of San Diego
Video Summary
A trio of wildfires have torched 100,000 acres in Southern California counties, forcing evacuations from fire threats and smoke, and prompting Gov. Gavin Newsom and county leaders to declare states of emergency to marshall firefighting resources.
But the fires highlight another, related crisis: the exodus of major insurance companies from fire-prone parts of California, including regions in San Diego County.
Researchers reveal a hidden factor in California’s insurance crisis: The ‘winner’s curse’ - Berkeley News
As lawmakers scramble to reform homeowners’ insurance regulations, a new study examines how insurers are pricing wildfire risk — and how different strategies can significantly impact premiums.
Ethan Swope/AP
July 18, 2024
Homeowners across the country are scrambling to keep up with the rising price of property insurance — and for people living in disaster-prone areas, the options for insuring their property are dwindling. Many insurers are raising premiums significantly or leaving high-risk markets altogether.
While climate change is a contributing factor, data suggest that higher rates are not always correlated with higher risks of climate-related disasters, like wildfires and hurricanes. In California, lawmakers are scrambling to reform regulations that were not designed with the pressures of climate change in mind.
“All of a sudden, regulators are finding themselves on the front lines of climate change, and that creates real challenges in rethinking how we’re regulating these property insurance markets,” said Meredith Fowlie, a professor of agricultural and resource economics at UC Berkeley.
Fowlie is co-author of a new study that takes a deep dive into the relationship between wildfire risk and insurance prices in California. Berkeley News spoke with Fowlie about the findings, which reveal how an economics phenomenon called the “winner’s curse” is an under-appreciated factor behind rising insurance premiums, and what this may mean for insurance regulators and consumers in the state.
The study was published as a National Bureau of Economic Research working paper and is co-authored by Judson Boomhower of UC San Diego, Jacob Gellman of the University of Alaska Anchorage and Andrew J. Plantinga of UC Santa Barbara.
Berkeley News: Could you describe the homeowners insurance crisis in California?
Meredith Fowlie: The main things we’re seeing are reduced affordability and availability of homeowner’s insurance policies. These concerning trends are not unique to California: Across the country, U.S. homeowner’s insurance premiums increased by more than 20% since last year. Major insurance groups are also pausing the writing of new policies in some areas, or pulling out of the market entirely, and that’s leaving homeowners with few options. Participation in last resort programs, like California’s FAIR Plan, is increasing.
To call this a crisis may sound alarmist, but I think it’s appropriate given the important role that homeowner’s insurance plays in our economy. If you’re a homeowner, you need homeowner’s insurance to qualify for a mortgage and hold on to your mortgage — so when prices are rising fast, homeowners have no choice but to pay them. And on the climate side, property insurance has a critical role to play in climate change adaptation. Here in California, wildfires are going to happen, and so we need a well-functioning homeowner’s insurance market to help households manage that climate risk and recover from natural disasters.
It’s such a core, important industry, so when we see these concerning developments in both prices and availability, it can be destabilizing for California and the rest of the country.
What factors are driving these sudden price spikes and lack of availability? Is it possible that California regulations are contributing to the problem?
There’s no question that insurer costs are increasing. Nationally, insurers are paying out more in claims than they’re receiving in premiums. While I think there’s been an appropriate focus on increasing climate risk, it’s important to remember that the climate crisis is not the only factor in play. Other factors include inflation in construction costs and increases in non-catastrophe losses and liability claims.
Here in California, there are limits to how quickly homeowners’ insurers can raise their rates without a costly and time-consuming public hearing. We’re hearing from insurers that this is limiting their ability to raise rates fast enough to keep up with costs, but consumer advocates insist that we need these guardrails to make sure that pricing is fair and affordable. My sense is that regulation has a role to play in the current crisis, but it also serves an important purpose. We need to strike a balance between allowing insurers to adjust their rates to reflect their costs and making sure that insurance rates remain as fair and affordable as possible.
In your new study, you examined how insurance premiums in California relate to underlying wildfire risk. What were you hoping to learn about the current crisis?
We really wanted to understand the factors that have been driving the rate increases we’re seeing. In a well-functioning market, insurance premiums should reflect the true cost of insuring a property. This helps people make informed decisions about where to live — and once they’ve decided where to live, what measures to take to mitigate their risk. It also helps ensure that insurers are able to pay out claims when disaster strikes.
We need to strike a balance between allowing insurers to adjust their rates to reflect their costs and making sure that insurance rates remain as fair and affordable as possible.
Prof. Meredith Fowlie
One possible explanation for the current crisis is that we’ve been underpricing climate risk historically. In other words, perhaps steep premium increases are a necessary — albeit unpleasant — adjustment to accurately reflect escalating climate risk.
To understand the empirical relationship between wildfire risk and homeowners insurance premiums in California, we took a deep dive into the data that insurers are using to price wildfire risk. We were really struck by the variation in how firms are pricing risk. Some large insurers are pricing wildfire risk at a very coarse level, such as at a ZIP code level. Other large insurers are pricing at a much more granular level. As a result, the insurance prices offered to homeowners in a high wildfire risk area can vary significantly across insurers.
Could these differences in how companies are pricing risk be contributing to higher insurance costs overall?
As economists, we got really interested in how these information asymmetries could be impacting competition between companies, and we were particularly interested in something economists call the winner’s curse. Imagine that one company is pricing insurance at a very coarse level, and it is competing with another company that is pricing insurance at a very granular level. The company that is pricing at a coarser level might worry that it is only getting business from the higher-risk homes that the other company is less excited about insuring — and, as a result, it might reasonably raise prices to insure against this potential risk.
Using detailed, property-level data on assessed wildfire risk and insurance premiums, we found evidence that is highly consistent with this kind of winner’s curse behavior. This has two important — and related — implications for California homeowners. First, these winner’s curse price adjustments are putting upward pressure on premiums in high-risk areas. Companies with less granular information price insurance higher because they are worried about “winning” higher risk homes. The second is reduced availability. California has price regulations in place which limit how much a firm can raise its rates without a public hearing. So if a firm with less granular information wants to increase prices to protect against the winner’s curse, and it runs up against that regulation, it might start pulling out of high-risk segments.
Currently, California lawmakers are considering a variety of regulatory reforms, including streamlining the rate approval process and expanding insurer’s ability to use catastrophe modeling to justify overall rate increases. Do you think these changes will help or hurt the current crisis?
Overall, the more reliable information we can bring to insurance pricing and underwriting, the better — especially in terms of signaling where the risk is high and where the risk is more manageable.
The more reliable information we can bring to insurance pricing and underwriting, the better.
Prof. Meredith Fowlie
There is a very high-stakes conversation right now about regulatory reform, and what our work suggests is that making it easier for all firms in the market to access more granular, more sophisticated wildfire risk estimates could help improve both the availability and affordability of insurance.
If you ignore this information piece and, for example, focus exclusively on making it easier for firms to raise their premiums, this could improve the availability of insurance at the expense of affordability. I’m not suggesting that information is the silver bullet, but it is an important tool in the toolkit that could improve both affordability and availability, rather than trading one for the other.
What are some of the barriers that prevent firms from accessing detailed information about wildfire risk?
We’ve been talking to both insurers and providers of these catastrophe model analytics, and one thing we’re hearing is that insurers face formidable “soft costs” in using these models. Firms need to license these models, they have to have people on staff who can use them expertly, and they have to interface with regulators to make sure that they are using them appropriately.
I believe some of the regulatory reforms are moving to address these issues, though I think it’s important to strike a balance between giving firms access to state-of-the-art models while also keeping rate setting transparent and fair.
Do you have any advice to homeowners who are trying to navigate the insurance market?
Insurance market regulation reform is underway, and I’m hopeful that this will deliver some real improvements, especially with respect to insurance availability. This should make it easier for California homeowners to find insurance in the coming months and years. But the reality is that, as the climate changes, insurance premiums are going to have to rise to reflect escalating risks. I think the entire state is reckoning with the extent to which we are exposed to wildfire risk, and what adapting to this rising risk will involve. Some of these costs will come in the form of higher insurance prices in high risk areas.
Something our research does not explore is the impact that rising insurance prices will have on lower-income households. Policymakers will need to get creative when navigating the difficult trade-offs between affordability and availability.
In June the San Bernardino County Board of Supervisors pulled the alarm on that problem, calling for the state to declare an emergency over dwindling home insurance options for people in high-risk areas.
That includes lots of places in Inland Empire deserts and mountains, where high heat and dry conditions make wildfire a constant danger. Adding to that, the region’s varied terrain leaves it vulnerable to a host of other calamities, including earthquakes, floods and even blizzards.
So far the Line Fire has burned more than 37,000 acres, forcing evacuations in campgrounds and communities, including Running Springs, Arrowbear Lake and Big Bear.
To the west, the Bridge Fire exploded Tuesday night from 4,000 acres to more than 50,000 acres, spreading from Los Angeles County into the Wrightwood community in San Bernardino County, and burning several dozen structures.
The Airport Fire grew to more than 23,000 acres as it spread from eastern Orange County into Riverside County, with the smoke visible from North County.
Although some homes and buildings were burned and there were several injuries, no lives have been lost as of Wednesday, but that has not always been the case. In 2003 the Old Fire burned more than 90,000 acres in the San Bernardino Mountains, destroyed more than 1,000 homes and killed six people. Other monstrous fires throughout the state also have wreaked havoc on the home insurance market.
Earlier this year insurance giant State Farm announced it would not renew 72,000 policies throughout the state. Last year both State Farm and Allstate stopped writing new policies in California.
That makes insurance hard to come by in many parts of the state that need it most, including the mountain and desert communities of the Inland Empire.
The Line Fire underscores the need to make insurance models reliable for customers and sustainable for insurers, said San Bernardino County Supervisor Dawn Rowe.
“From the homeowners’ perspective, this is all the more reason why they have to have insurance, and why insurance exists to protect them from a loss,” Rowe said before touring an evacuation zone. “From the insurance companies’ perspective, they might say this (fire) is what we’re talking about, this is a probability, not just a possibility.”
Homeowners who can’t get commercial insurance can apply for coverage under the California FAIR plan, the state’s high-risk pool. But that’s more expensive, and they’ll have to buy pricey wraparound policies to cover routine claims such as theft, liability or water damage.
Also the plan was intended to be a last resort, not the policy of choice for hundreds of thousands of customers.
Insurance Commissioner Ricardo Lara took steps to make California regulations more friendly for insurers. CalMatters reporter Levi Sumagaysay explained how the new rules would work.
The first reform will streamline rate reviews. The other regulation lets insurers use catastrophe modeling — which factors in historic claims as well as projected losses — to set rates.
The reforms won’t take effect for a while. Rowe said supervisors are pushing for additional safeguards to provide homeowners with advance notice of policy cancellations and a means to appeal them.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters.
Inland Empire wildfire threats cast light on home insurance crisis
In summary
In addition to wildfires, the residents and property owners in the Inland Empire face another crisis, the departure of companies willing to insure homes against catastrophes.
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A trio of wildfires have torched 100,000 acres in the Inland Empire and surrounding counties, forcing evacuations from fire threats and smoke, and prompting Gov. Gavin Newsom and county supervisors to declare a state of emergency to marshall firefighting resources to the area.
The fires highlight another, related crisis: the exodus of major insurance companies from California.
In June the San Bernardino County Board of Supervisors pulled the alarm on that problem, calling for the state to declare an emergency over the dwindling home insurance options for people in high-risk areas. That includes lots of places in the Inland Empire’s deserts and mountains, where high heat and dry conditions make wildfire a constant danger. Adding to that, the region’s varied terrain leaves it vulnerable to a host of other calamities, including earthquakes, floods and even blizzards.
So far the Line Fire has burned more than 37,000 acres, forced evacuations in campgrounds and communities, including Running Springs, Arrowbear Lake and Big Bear. To the west, the Bridge Fire exploded Tuesday night from 4,000 acres to more than 50,000 acres, spreading from Los Angeles County into the Wrightwood community in San Bernardino County, and burning several dozen structures. The Airport Fire grew to more than 23,000 acres as it spread from eastern Orange County into Riverside County.
Although some homes and buildings were burned and there were several injuries, no lives have been lost as of Wednesday, but that has not always been the case. In 2003 the Old Fire burned more than 90,000 acres in the San Bernardino Mountains, destroyed more than 1,000 homes and killed six people. Other monstrous fires throughout the state also have wreaked havoc on the home insurance market.
Earlier this year insurance giant State Farm announced it would not renew 72,000 policies throughout the state. Last year both State Farm and Allstate stopped writing new policies in California.
That makes insurance hard to come by in many parts of the state that need it most, including the mountain and desert communities of the Inland Empire.
The Line Fire underscores the need to make insurance models reliable for customers and sustainable for insurers, said San Bernardino County Supervisor Dawn Rowe.
“From the homeowners’ perspective, this is all the more reason why they have to have insurance, and why insurance exists to protect them from a loss,” Rowe said before touring an evacuation zone. “From the insurance companies’ perspective, they might say this (fire) is what we’re talking about, this is a probability, not just a possibility.”
Homeowners who can’t get commercial insurance can apply for coverage under the California FAIR plan, the state’s high-risk pool. But that’s more expensive, and they’ll have to buy pricey wraparound policies to cover routine claims such as theft, liability or water damage. Also the plan was intended to be a last resort, not the policy of choice for hundreds of thousands of customers.
Insurance Commissioner Ricardo Lara took steps to make California regulations more friendly for insurers. CalMatters reporter Levi Sumagaysay explained how the new rules would work.
The first reform will streamline rate reviews. The other regulation lets insurers use catastrophe modeling — which factors in historic claims as well as projected losses — to set rates.
The reforms won’t take effect for a while. Rowe said supervisors are pushing for additional safeguards to provide homeowners with advance notice of policy cancellations and a means to appeal them.
Deborah Sullivan Brennan is the San Diego and Inland Empire reporter for CalMatters, in partnership with Voice of San Diego. She writes about life, politics, the economy and environment in Riverside and...
California Commissioner Invites Input on Final Phase of Wildfire Modeling Regulation
California Insurance Commissioner Ricardo Lara has invited public input as he begins the final phase of approving a “first of its kind” catastrophe modeling and ratemaking regulation that “will help restore options for all Californians and prepare for the reality of climate change,” according to a California Department of Insurance news release.
The Office of Administrative Law has published the draft text of the regulation online, marking the beginning of a public comment period that will conclude with a hearing convened by Commissioner Lara on Tuesday, Sept. 17.
The proposed text details the commitments that insurance companies must make in future rate filings to write more policies in wildfire distressed areas as a condition for using wildfire catastrophe modeling to more accurately assess the wildfire risks they will write. The regulation also provides for the public review of models used in ratemaking, as required under California law. This marks two firsts for the state’s regulation of insurance rates: the first time insurance companies will commit to covering higher-risk homes in wildfire-distressed areas, and the first use of forward-looking wildfire catastrophe modeling.
According to the news release, the regulation has received strong public support in two previous public meetings the department has held.
“Climate change is affecting every part of our lives, making insurance harder to find and more costly for those at the greatest risk,” Commissioner Lara said. “With climate-driven mega-fires burning across the state, it is clear that relying on decades-old regulations only hurts our ability to prepare for the future. My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by my department’s rate regulation experts.”
Commissioner Lara’s strategy addresses the major limitations of Proposition 103, which was passed by voters in 1988. Under that law, insurance companies are free to propose rates at any level needed to cover future losses but, unlike public utilities, are not required to cover all residents.
Related: 2.6M Homes with a Cost of $1.3 Trillion at Moderate to Very High Risk of Wildfire
With the combination of increasing climate risks, rising costs of repair and rebuilding and global economic forces, major companies have increased rates while pulling back from higher-risk properties, resulting in areas where the FAIR Plan is now the only option for consumers. In June, the California Department of Insurance released a first-ever map showing where FAIR Plan policies have grown and the traditional insurance market has retreated. The proposed regulation focuses on reversing FAIR Plan growth as a result of insurance companies committing to write more in high-risk areas through the use of wildfire catastrophe models in ratemaking.
For the past 30 years, California regulations have required insurance companies to apply a catastrophe factor to insurance rates based on historical wildfire losses over the past 20 years. These “outdated” rules have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally as a result of local, state and federal investments, per the release.
“Over the past several years, the state has put billions toward wildfire mitigation efforts and homeowners have made significant investments in home hardening,” Commissioner Lara said. “Under Prop. 103’s existing regulatory framework, this is not accounted for by our existing retrospective, past-focused models for ratemaking. We want consumers to reap the full benefits of these efforts through modern, forward-looking models on how rates are calculated.”
The Department of Insurance will hold a virtual public hearing to take input on the proposed regulation on September 17, 2024, at 10 a.m. Pacific Time.
Written comments can be submitted to CDIRegulations@insurance.ca.gov.
What Others Have Said in Public Comments
Sarah Heard, director, MarketLab, The Nature Conservancy: “TNC appreciates and supports the proposed regulation requiring catastrophe models used in rate setting to incorporate risk mitigation at the property, community, and landscape scale … Requiring catastrophe models, used by insurers for pricing, to incorporate landscape-scale mitigation is a big step forward in rewarding essential investments in wildfire resilience.”
Anne Cottrell, Napa County Supervisor: “Moving toward a catastrophe model makes so much sense in this age of climate change. We need to be looking forward … We need to ask the insurers to include consideration of community and large-scale wildfire risk mitigation, because that’s the right thing for communities to do to make their communities safer and their properties safer. And we need to see that value reflected in the insurance industry.”
Peter Ansel, senior policy advocate, California Farm Bureau: “Right now, access to insurance is our members’ largest issue. They understand that the adoption of the modeling and the inclusion of reinsurance is going to have an impact on consumers’ cost for insurance to reflect actual risks, and they’re willing to absorb those costs so long as they’re fair and equitable, but they really need access. Working farms and ranches across California are often swept up in residential and commercial insurance policy cancellations and non-renewals that seem to occur at a zip code level, even though agricultural lands present a low risk for wildfire propagation. Because crops are actively managed, harvested, and most often irrigated, which reduces the amount of dry vegetation available to burn, agricultural lands typically have lower fuel loads compared to forests and natural grasslands.”
Kim George, battalion chief, South Lake Tahoe Fire Rescue: “We’ve put a lot of work into making sure that our amazing community, beautiful Lake Tahoe, is protected. And our community is very well aware of the fire dangers because we just lived through this with the Caldor Fire … The hope is that this catastrophe modeling will take such things into consideration.”
Dave Winnacker, fire chief, Orinda-Moraga Fire Protection District: “The parcel- and community-level mitigations included in CDI’s Safer from Wildfire Framework and the very similar parcel level mitigations included in the IBHS Wildfire Prepared Home represent a science-based approach to creating fire-adapted communities that can be in or adjacent to the inevitable wildfire perimeters without experiencing catastrophic loss…. The science is crystal-clear, that at the community level, we have agency to reduce wildfire risk using CDI’s recommendations.”
Keith Fountain, commenting on behalf of The Palisades Tahoe Lodge Owners Association: “We’ve gone to great lengths to make our property safe from fire, but we can’t get insurance at a reasonable cost. And we look forward to you moving quickly to help establish a fair and competitive insurance market in California that recognizes our efforts and our circumstances through the modeling that these agencies do or what other mechanisms you can impose upon them.”
Jolena Voorhis, commenting on behalf of the League of California Cities: “The wildfire mitigations that have been conducted by local governments, nonprofits, and homeowners are essential for public safety. These mitigation efforts require significant resources, and Cal Cities strongly believes that these costs [should] be considered in the catastrophe modeling and the underwriting process.”
Topics California Catastrophe Natural Disasters Legislation Wildfire
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