The Palisades Fire is the first big test for California's new home insurance scheme

California traded higher premiums for expanded coverage, but monster 
blazes like the ones currently devouring parts of Los Angeles could still 
drive away home insurers

This article by Grist is published here as part of the global journalism 
collaboration Covering Climate Now. It has been edited to conform with 
Corporate Knights style.

On Tuesday, after a ferocious Santa Ana windstorm blew through Southern 
California, a severe brush fire broke out in the wealthy Pacific Palisades 
neighborhood of Los Angeles, burning 1,000 structures and forcing tens of 
thousands of residents to evacuate as of Wednesday afternoon. Another 
large brush fire broke out near Pasadena around the same time, killing at 
least two people. Together the two blazes threatened some of the most 
valuable homes and businesses in the United States. The damage from the 
Palisades Fire alone could exceed US$10 billion, according to a 
preliminary estimate from J.P. Morgan.

If this estimate holds true, it will test insurers’ commitment to a market 
that has been teetering on the verge of collapse for the better part of a 
decade now. 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 wildfires in 2017 and 2018, 
insurance companies have fled the state, dropped tens of thousands of 
customers in flammable areas, and raised prices by double-digit 
percentages.

A requirement to expand insurance coverage
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 
claimed will bring companies back into the fold as they take effect this 
year.

“This is a historic moment for California,” said Ricardo Lara, the state’s 
insurance commissioner, when he revealed the rules in December. “With 
input from thousands of residents throughout California, this reform 
balances protecting consumers with the need to strengthen our market 
against climate risks.”

The rules come after months of debate among 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,” the fire-prone 
scrubland and mountain regions where insurers are now hiking prices and 
dropping customers.

Companies will soon have to ensure that their market share in these areas 
is at least 85 percent of their total statewide market share — in other 
words, if a company controls 10 percent of the state’s insurance market, 
it must control at least 8.5 percent of the market in fire-prone areas.

This mandate should push big companies like State Farm and Allstate to 
pick up customers they’ve dropped in flammable regions like the 
mountainous north of the state. Some companies have already begun to offer 
new policies in burned areas in anticipation of the state’s new rules: the 
insurance company Mercury announced last week that it will be the first 
insurance company in the state to offer new policies in Paradise, 
California, which was destroyed in the catastrophic 2018 Camp Fire. The 
move recognizes the town’s work to mitigate future fires by clearing trees 
and hardening homes.

Expanded coverage comes with a high cost
The requirement to expand coverage, coupled with recent announcements from 
companies like Mercury, “should give consumers hope that competition and 
options will be returning,” said Amy Bach, the head of insurance customer 
advocacy group United Policyholders, in a statement.

In return for this added coverage, the state is making a few big tweaks 
that will allow insurers to pass on the price of fire risk to their 
customers. California is the only state in the country that doesn’t allow 
insurance companies to use forward-looking “catastrophe models” when they 
set prices. It also prohibits companies from factoring in the rising costs 
of reinsurance, the insurance purchased by insurance companies to ensure 
they’re able to pay out big claims.

These two restrictions have kept prices artificially low for years, and 
also prevented insurers from planning for climate change impacts, creating 
a de facto subsidy for homeowners in risky areas. But these protections 
were removed in an attempt to coax insurers back into the market.

“This addresses the major stumbling blocks that companies have been 
identifying for a decade, so that’s a positive,” said Rex Frazier, the 
president of the Personal Insurance Federation of California, the state’s 
leading insurance trade group.

This trade-off has some residents in fire-prone areas worried. Insurance 
companies might now have to offer more policies in flammable zones, but 
they also have more latitude to increase prices.

“I’m not optimistic that it will improve the experience of the consumer, 
as the insurers can now pass certain costs onto consumers, which I’m 
expecting will result in higher premiums,” said Jason Lloyd, who moved to 
mountainous Lake County last spring. He and his wife came to the area 
because they wanted to be closer to his wife’s family, but when they made 
an offer on a home, they learned that they would have to pay more than 
$8,000 a year for insurance, or else go to the California FAIR Plan, a 
state-run insurance program that offers minimal 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 premium is still more than $4,500 a year, more than triple what 
it was on their last home in Kansas. Lloyd is worried that his insurance 
company will hike his price further under the new rules.

Making a bargain with the insurance industry
Other states across the West such as Colorado and Oregon are also seeing 
insurance coverage gaps emerge after big wildfires, though their problems 
are less acute than those in the Golden State. In Colorado, for instance, 
officials just recently established a state fire insurance backstop like 
California’s FAIR Plan, since it’s only in the past few years that 
customers there have been dropped en masse.

California’s grand bargain with the insurance industry provides a 
blueprint for those other states: If you want to address coverage gaps, 
you need to give insurers broader authority to set prices.

Even this might not be enough. The past few years have seen a reprieve 
from major wildfires like the ones that struck in 2017 and 2018, but this 
week’s blazes in the Los Angeles area could cause billions of dollars of 
damage, on par with an event like the Camp Fire.

Joel Laucher, a former regulator and fire insurance expert at the consumer 
advocacy organization United Policyholders, said that the damage from the 
Los Angeles blazes could lead to further price hikes and more availability 
gaps.

“These are going to be major losses, certainly,” he told Grist. “Certain 
areas are definitely going to have new challenges, to the degree that 
insurers are going to be able to charge to the rate they believe those 
areas deserve to pay.” Laucher said that insurance companies may not 
decline to renew as many policies as they might have under previous state 
rules, but they could still avoid selling policies in some of the affected 
areas.

Frazier, of the insurance trade group, voiced similar concerns. He said 
that another round of monster blazes on the scale of 2017 and 2018 could 
drive the insurance industry away from the state once again, despite the 
commissioners’ reforms.

“If we were to have a couple more unprecedented years, all bets are off,” 
he told Grist.

https://www.corporateknights.com/category-climate/california-home-
insurance-wildfire/