California's insurance is in crisis. The solution will cost homeowners a ton
cnn.com
cnn.com
Up until very recently, California had laws that prevented insurers from factoring in climate change, reinsurance costs (most home insurers get insurance themselves), and modeled results.
This is great for consumers in the sense that it keeps insurance costs low. It's bad in the sense that it underprices the risk in fire-prone areas by a lot. Historical losses don't work well for a tail-driven risk like wildfire or hurricane, where losses are infrequent but massive. California already allows modeled results for earthquake for similar reasons.
Accurately pricing tail risk is difficult for people to understand, because it looks overpriced for 10 years and then has all of the profits for the decade wiped out because of a single fire.
Now, are insurance companies saints? Of course not. They're trying to get as much money as possible from you. But it's a pretty competitive market, so if nobody wants to give you a policy, that says something.
Other states figured this out a long time ago, there is no magic here.
Two more reasonable outcomes:
1. States forbid construction in those places.
2. States allow construction, but you're on your own re: insurance.
Of course, the ideal outcome would be:
3. States allow construction, and insurers are allowed to underwrite.
It's also worth saying that in your 3 scenarios the outcomes are:
1. Fires still start there because the conditions which cause those fires have little, if anything, to do with the presence of that construction. Said fires would move far more rapidly through the usual untended scrub brush than it does through large, built-up areas. Now you have the same fire problem, but in a slightly different area.
2. That seems like a recipe to make it into even more of an exclusive enclave for the super-rich. Who else can afford to eat that sort of risk, shrug, and rebuild?
3. Then we're back at the start, where the negligent policies of a series of state governments produces a terrible outcome for homeowners who are not the cause of the problem.
I propose a more functional response: Let the state pay for its mistake, and require that they follow the plans of states like Oregon, Texas, and Florida, and use controlled burns appropriately! They'll be incentivized to do so as a means to keep their liability to fire insurance down, and as a bonus homeowners won't have to live through cycles of being burned out and returning.
And again, just because THIS time the fire primarily impacted the rich, doesn't mean that's how it always has been or will be.
How about a simpler response: let insurers underwrite.
I don't think we should be subsidizing that. Yes, if you want to live in LA foothills like Bel Air (not affected by the current fire, but hit by fires before), you are going to have to pay more for fire insurance. It just goes with the price of the view.
In addition, California does kind of subsidize these locations. They offer insurance through the FAIR plan, which is (by most accounts) woefully undercapitalized.
- In the case for CA if the companies are forced to charge a real price for the risk, costs would go up. Maybe the millionaires can afford it, but in a crunched housing market the average person will feel the strain.
- If they are forced to not up their prices (or their increases are capped) and provide polices even though their risk calculations says they will lose money. The insurance company will then look to get the profits elsewhere, ie raise rates for those who are not effected.
- If the insurance company goes under then the government might bail them out, which means effectively every tax payer will be forced to pay for that policy.
If the state provided this insurance, then they would be incentivized to properly assess and mitigate the risk. Where in today's market insurance companies just put a yearly amount on the risk of a home. They have no direct levers to reduce the risk.
LA had a ton of rain in Feb-Mar 2024 which resulted in massive fuel growth. That rain stopped in a hurry, plunging the region straight into drought.
That fuel has since cured over summer and become available to fire. Once it ignited, it was driven by extreme winds and there was no stopping it.
Given the circumstances, when do you suggest prescribed burns could've been conducted?
https://www.bbc.com/future/article/20230922-these-la-goats-h...
Who is this “we”? The rest of the world? I don’t think the rest of the world is being asked by America to care. It is Americans caring about Americans or Californians caring for Californians at the very least.
At the end of the day, having your house burned to the ground, having to escape a deadly fire, have you seen everyone go a bit mad and crazy, fearing for your life? These people can be the richest people in the world, and I’d think it’s inhuman not to sympathize with them somewhat. It is a situation every person could find potentially life-destroying and traumatic.