What’s next for home insurance in California after the Los Angeles fires?

Citing perilous risks in residential areas primed to burn, insurance companies in recent years have dropped hundreds of thousands of policies, leaving California residents scrambling for coverage. Each new wave of cancellations is followed by talks and reforms and a growing sense of unease among homeowners.

With fires in and near Los Angeles predicted to be among the costliest disasters in U.S. history, questions abound: How will California’s “insurer of last resort” respond? What will fires in Southern California, and climate change more broadly, mean for Bay Area ratepayers? Will recent regulatory changes and lessons from other states affect the future of insurance in the Golden State? Might renters even be on the hook for the increased costs?

These are familiar concerns for Dave Jones, director of the Climate Risk Initiative at UC Berkeley’s Center for Law Energy & the Environment. From 2011 to 2018, Jones served two terms as the California insurance commissioner, where he oversaw regulatory policy after some of the state’s most catastrophic wildfires. While insurers need to hold up their end of the bargain and issue policies, he said, they also can’t “rate increase their way out of the climate crisis.”

“Growing risks and losses from climate change-driven events will outrun rate increases and other regulatory changes,” Jones said in an interview with UC Berkeley News. “. . . Insurance availability and pricing is the canary in the coal mine for the climate crisis, and the canary is about to expire.”

UC Berkeley News: Fires are still burning around Los Angeles and the devastation is being tallied. But given what we know, what might the broad effects be on the insurance market in California?

Dave Jones: Home insurers asked the insurance commissioner to adopt a set of regulatory changes last year and said that if those changes were adopted, they would start writing new insurance policies. The insurance commissioner, after a yearlong process, adopted all of the changes sought by the insurers. 

Specifically, the new regulations allow insurers to use forward-looking probabilistic models to determine the catastrophe load of the insurance rate and allow insurers to include the cost they pay for reinsurance, meaning their own insurance, in their rates. The insurers also asked for — and got — relief from having to pay an assessment if claims made against the California FAIR Plan, which by state law has to write insurance for those who cannot obtain private insurance, exceed its ability to pay. Instead, that assessment will fall on all policyholders in the state.  

As they got the regulatory changes they asked for, insurers should follow through on their commitment to start writing new insurance again and to write and renew more insurance in the areas of high risk of wildfire. Before the LA wildfires, insurers said they would be filing for substantial rate increases under the new regulations. After the LA wildfires, with a projected $10 to $20 billion so far in insured losses, insurers will be filing for even higher rate increases.

With regard to the LA wildfires, sadly, it was a question of “when,” not “if,” major catastrophic wildfires would occur in California. Global temperatures continue to rise, causing climate change, which in turn is driving more severe and extreme weather-related events. The fact that this occurred is not something that the insurers did not predict at the time they asked for and got the regulatory changes. So the LA wildfires should not be a basis for insurers to renege on their commitment to start writing and renewing more insurance in California. But they might nonetheless do so.

What should policyholders and policymakers watch for and expect in the weeks and months ahead in California? Is our current approach to insurance sustainable?

In the short and medium terms, giving insurers more rate (by charging more through premiums) and reducing their costs should get insurers in California to start writing and renewing insurance again, as they said they would. But in the longer run, insurers are not going to be able to rate increase their way out of the climate crisis. 

Climate scientists tell us that the failure to transition from fossil fuels and other greenhouse gas-emitting industries means that global temperatures will continue to climb. As a result, there will be more extreme and severe weather-related catastrophes, which will kill and injure more people and destroy more homes, businesses and whole communities in this country and globally.

This also means that insurers’ losses will keep climbing. Growing risks and losses from climate change-driven events will outrun rate increases and other regulatory changes granted to insurers in the longer run. 

All of this means that we are marching toward an uninsurable future in this country and across the globe. Florida, Louisiana and California are not alone. The New York Times found at least 18 states where insurers are raising rates and reducing the writing or renewing of insurance due to climate-driven extreme weather-related events.

Insurance availability and pricing is the canary in the coal mine for the climate crisis, and the canary is about to expire.

The California FAIR (Fair Access to Insurance Requirements) Plan, aka the “insurer of last resort,” has received a lot of attention. What is it? What is it not? And can it handle the demand from these fires?

Thirty-five states have a FAIR Plan. It is not a state agency. It is not taxpayer-funded. It is a statutorily mandated, involuntary association of the private property and casualty insurers. It writes risks that the private insurers will not write. 

It will be able to pay all claims, although it may have to resort to assessing all California policyholders to do so. The California FAIR Plan reports that it has only $200 million in reserves and $2.5 billion in reinsurance. The LA wildfires may exceed its reserves and reinsurance. However, state FAIR Plan laws provide that, in the event the FAIR Plan has a shortfall of funds, it can charge all private insurers in the state based on their portion of the insurance market.

Insurers in Louisiana and Florida convinced their state legislatures to change the law so that all home and business policyholders in the state are assessed. Last year, the California insurance commissioner issued an order to the California FAIR Plan that basically adopts the Florida and Louisiana rules. Insurers in California are collectively on the hook for the first $1 billion above what the FAIR Plan can pay, and they can collect half of that from their policyholders. For any funds needed above $1 billion, the order provides that insurers and the FAIR Plan can obtain approval to assess all policyholders in the state. 

It’s possible that the FAIR Plan could have losses from the wildfires that exceed its reserves and reinsurance and then assess insurers for $1 billion and then assess all policyholders in the state. This assessment, if it occurs, will be on top of substantial rate increases that were anticipated before the fires for all Californians and which will be even higher now. 

You mentioned Florida. What do we in California need to understand about its approach to insurance?

Florida is an example of this phenomenon of losses and risks outpacing regulatory changes. The Florida Legislature and governor have granted insurers, for some time now, all of the regulatory changes they have requested. Florida allows probabilistic models to be used for rates, allows reinsurance costs to be included in rates, has established two taxpayer-backed public reinsurance pools to lower the cost of reinsurance for private insurers, has limited third-party lawsuits against insurers, has eliminated private insurers’ exposure to an assessment if Florida’s Citizens Property Insurance Corp. — which, like the FAIR Plan, issues insurance for homes and businesses that the private insurers won’t insure — runs out of money. Florida has done everything that California has done at the request of the insurers and then some. Rates in Florida are three-to-four times the national average.

Yet, even with all of this, Farmers announced last year that it was not renewing or writing any new home, auto or umbrella insurance in Florida. They left the state entirely, as have just about all the other national carriers, if not all. Why? Because climate change is making hurricanes more extreme in Florida. National insurers have concluded that they can’t make a profit in Florida, even with Florida granting them everything they have asked for in regulatory changes and higher rates. Florida is Exhibit A that relaxing insurance regulations and rate increases are not going to be sufficient to outrun climate change.

Many people outside the western U.S. might not be so familiar with the fire insurance challenges in California. But they’ve likely heard of problems with the National Flood Insurance Program (NFIP) during hurricane season. How is that different? 

The National Flood Insurance Program was established 60 years ago or so to write flood insurance because private home insurers excluded flood coverage in their home insurance policies. It is different from state FAIR Plans in that the NFIP is taxpayer-funded. Historically, the NFIP did not price the flood insurance based on risk, and so it needed to be bailed out every 10 years or so by taxpayers. 

FAIR Plans are not taxpayer-funded. They are not a government program like the NFIP. Because private insurers exclude flood coverage, we need an NFIP. The NFIP is beginning to raise rates to charge based on risk, which is one of several reforms needed in the program. 

Many people have reported being dropped from their policies and were uninsured for this disaster. What financial resources should they be aware of?

When your private home insurer declines to renew your home insurance policy, you should contact other insurers to see if they will write you insurance. If you cannot find a traditional admitted insurer to insure you, you should contact a surplus lines broker to see if they can find you private insurance in the largely unregulated surplus lines market. You can also obtain insurance from the FAIR Plan. 

Most homeowners who were non-renewed obtained insurance from either another insurer, from the surplus lines market or from the FAIR Plan. For those who did not take FAIR Plan insurance and were uninsured, there are limited resources. FEMA provides very limited resources — perhaps a grant of $20,000 or so. There are also some limited federal loan programs. Federal, state and local programs are typically not available to fund rebuilding of homes. 

We’ve talked a lot about homeowners insurance. But what effect might this have on renters’ policies in California areas with wildfire risk?

Renters insurance rates were expected to go up before the wildfires and will increase even more due to the wildfires. With the regulatory changes they were granted, insurers were supposed to start making renters insurance more available. But with the LA fires, they may pull back on the amount of home, business and renters insurance they write.

This interview was lightly edited for clarity.