California’s wildfires may be a big blow to its insurance market

Getting insurance on the Little Red Hen, where I used to work, but I didn’t have insurance on that day. And when did I realize that I had insurance?

Bach, the consumer advocate, has another concern—people who may have decided to drop their insurance coverage. “For lower-income people who lived in the home they had, they may have simply said I couldn’t afford it, because it was too expensive for them,” she says. Some of those people may have had no insurance.

He owns the building that was home to The Little Red Hen, a coffee shop that’s now just a slab and ashes. He says, “Getting insurance on the Little Red Hen was very difficult because of what just happened. I think it’s going to be very, very difficult, even if you build back. It’s going be difficult to get insurance or it’s going to be really expensive.”

The massive losses incurred from those fires “wiped out more than a quarter century of cumulative profits for the industry twice over,” according to Carolyn Kousky, of the Environmental Defense Fund, who researches climate risk and policy. The change was a shake-up for people who now know that the costs and risks of climate change are high and it isn’t stabilizing.

California’s FAIR home insurance policy is running out of money: When hurricane Ian struck Florida in 2022 became the most expensive hurricane in Florida history

Homeowners were forced to purchase California’s FAIR plan because the insurance companies stopped writing new policies in these areas. The state created and funds the plan that is known as the insurer of last resort. Jones says so many homes in Pacific Palisades had coverage from FAIR, that it may run out of money. A special assessment will be imposed on home insurance policyholders in the state if there’s a reason for it.

Perry and her family have renter’s insurance to pay for relocation and replacements of their possessions, they leased the home. That was until last year. Nobody was insured up this way, we were told. So, we had no choice,” she said. Kwynn, her husband Brian and son Ellison are reliant on FEMA and a GoFundMe page due to lack of insurance.

And since home insurance is a prerequisite for getting and having a mortgage, Fowlie says, it’s a particularly pressing issue for those who live in those high-risk ZIP codes, many of whom are struggling to afford the higher insurance rates needed for homeownership.

Take Florida, where 16 insurer carriers have become insolvent since 2017 and 16 others have stopped writing policies, even though Floridians pay the highest premiums on average in the United States. The state-backed insurer of last resort, Citizens Property Insurance, started getting many more policy holders, NPR reported in 2022.

At the time that Hurricane Ian hit the state in September 2022, many worried that the expensive payouts after the hurricane could be the final straw for many insurance companies. And it was, Central Florida Public Media reports, as Ian proved to be the most expensive storm in Florida history: Over 30 insurance carriers left the state.

Household budgets have been getting hit with higher home insurance costs. Since 2020 premiums have gone up by an average of 13%, but that doesn’t indicate how much they have gotten worse in some parts of the country.

“What we’ve been telling people nationally and in our meetings with other insurance commissioners is do not wait until California comes to a theater near you and you’re getting insurance companies to either restrict their portfolios in the state or leaving the state,” he says.

In the near future, insurance rates in California are expected to spike — but not necessarily because of the fires. The California Department of Insurance had to pass regulations to increase access to insurance.

Insurance companies have wanted to base their rates on forward-looking models of climate risk in the state for a long time, and new regulations allow that, without needing to cite historical data. In return, the companies promised to write more policies in high-wildfire-risk areas, and to take any firemitigation efforts into account in lowering their rates.

“Insurers gave up some of their rights in order to make them more comfortable doing business with people with insurance policies,” said Amy Bach, executive director of United Policyholders.

But if the past few years have demonstrated anything, it’s that traditional insurance models have had trouble accounting for the “known unknown” risks that climate change poses, the Environmental Defense Fund’s Kousky says, making it difficult to provide coverage affordably.

“I think the big question now, after what we’re seeing in the LA region, is, you know, how far can regulatory changes go in helping maintain insurability in this environment of really catastrophic wildfire risk?” she says.

“It’s the one place where I feel lots of Americans are seeing the costs of climate hit their pocketbooks,” she says. “And it’s like a kitchen table economics problem now. And yet it’s directly related to what we’ve been doing with the climate. And I think it’s maybe one of the first places that lots of people are grappling with that.”

“These newer risk-modeling tools are definitely helping insurers come to terms with what wildfire risk looks like in California and how they’d want to price it in order to ensure that they are ready to pay when claims come in,” she says.

Climate Change is Upending the Insurance Cost of Homebuilding in the United States: Los Angeles Wildfires and Hurricanes Are Coming to an End

She says that increased costs of the construction materials and skilled labor needed to repair and rebuild homes are among other things that are going up. That’s the case across the country.

As the wildfires in Los Angeles tear through hillsides, raze neighborhoods and displace residents, it’s too early to know how vast the destruction will be when the last of the flames is put out. Initial estimates say that the costs will be huge. One leading climate scientist, Daniel Swain of the University of California, Los Angeles, told KQED that the fires could become some of the costliest in U.S. history; as of Monday afternoon, AccuWeather experts said that total losses could cost somewhere from $250 billion to $275 billion.

Experts and policymakers agree: Climate change is upending the way that homes are insured in the United States. What used to be “once-in-a-Generation” weather catastrophes occur more and more frequently across the country. And as insurance companies contend with the sum total of these disasters, those higher costs are passed on to policyholders.