The LA Fires Burned Homes. The Data Show Insurers Saw the Risks
barrons.com
barrons.com
And very generally, if insurance won't cover it, you can't build it or make a business out of it.
I see this as the banal way that we will inevitably deal with the aftermath of ignoring climate change.
There are quite a few parts of the country where this isn't true. In some it recently became so. Where it's been true longer, land values are lower and folks build cheaper. (Go back further and most structures weren't built to be durable over decades.)
> Several insurance companies have either fled California, stopped writing new policies or otherwise reduced their exposure in the Golden State, citing business risks amid rising replacement costs and the inability to adequately raise premiums.
THIS
IS
CALIFORNIA!
I'm not sure I follow: Isn't the entire point of raising rates (I assume you mean raising insurance premiums) to compensate for higher risk?
Breaking it down: "What if the US gov ... allow insurers to raise rates".
Now color me confused.
If the government doesn't recognize that there is a very real, very significant risk of wildfire and prohibits pricing it in (whether based upon location or mitigation factors) insurers will leave the market, effectively rendering the houses ineligible for subsidized mortgages.
The question you posed as a future potential problem is: "What if the US gov ... allow insurers to raise rates".
So again, color me confused. What is the problem with the government allowing insurance companies to raise premiums?
> Perhaps the more pertinent question is what if the US gov doesn't recognize the risk and allow insurers to raise rates.
Breaking it down: if the US gov (or its subdivisions) believes the risk is "gouging" or "egregious" or "too expensive" and prohibits rate increases, an insurer thinks they'll lose money, and leave the market. When this happens either the gov steps in as an insurer of last resort (and loses tons of money, because underwriting isn't a political problem), or insurance products cease to be sold in that area.
If insurance is no longer available, the house is no longer eligible for a fannie/freddie conforming loan, and is for all practical purposes ineligible for a mortgage. The local property market dies overnight.
You worded the original query badly then.
I read it like follows:
What if the US gov:
* doesn't recognize the risk and
* allow insurers to raise rates
Hence my confusion: Why is it bad for the US government to let insurers raise rates?
EDIT: Copypasta fail. :V
Because of a very, very, bad decision to make the California (and I really should have written California gov, not US gov) an elected position. And people like voting for the guy who prevents prices from going up.
You however worded the original query in such a way that I read it as the US government allowing insurers to raise rates is a bad thing.
That's why I was confused. All I advise is you choose your wording a bit more carefully in the future.
It makes sense that way, plus if "allow insurers to raise rates" was a separate clause the verb should be "allows".
"What if the US gov doesn't (recognize the risk and allow insurers to raise rates)".
The only grammatical way for your interpretation to be correct is if "allow" was "allows". (However, I will grant that many posters, here and elsewhere, are sufficiently careless with their typing that one could easily assume that was the intent.)
Also, I don't think the government is predominantly to blame. I'd wager plenty of people in local, state, federal governments know that these locations need to be expensive to insure or are basically uninsurable. However, voters refuse to accept the reality of increasing risks due climate change, urban sprawl, and other factors. Politicians lack the incentive (or spine) to be honest about these risks. And anyone else in government, especially scientists, that do state the risks plainly are either ignored, censored, or fired.
And its only going to get worse. As more companies pull out, governments will step in (pressured by voters) to be the insurers of last resort. This is already true in Florida (see: https://en.wikipedia.org/wiki/Citizens_Property_Insurance_Co...) and (I believe) California. At some point, natural disasters will probably cause these government insurers to go (basically) bankrupt since they're insuring rich people's million dollar houses on Florida's coast and in California forests.
Edit: I'd also wager companies are more than happy to price-gouge in situations like this too. I expect this is both premiums being insufficiently high and companies seeing profit opportunities.
"Hypothetically, if we were to jam every human on earth into a space the size of Texas; it would just have the same pop. density as Manhattan" is not remotely the same as "in practice, all of humanity could comfortably live in a space the size of Texas with the density of Manhattan."
In the current landscape I think very few people on a global scale has any sympathy with Americans being affected by the changing climate.
(I don't know your personal political opinions here, this irony is blurred over the entire political landscape).
* not just the current noise from Trump, the 20 years in the UK before I moved to Germany
(the Chinese system of internal migration control that prevented everyone from migrating to the cities immediately)
And there is plenty that can be done to reduce the fire risk to bring premiums down.
CA is hardly the first place to have a high fire risk.
There are impossibility proofs in many domains and I wouldn’t be surprised to discover that there are certain conditions that create circumstances that aren’t insurable.
Asking sincerely
I would argue that if the cost of the insurance exceeds the available money, that counts as de facto "uninsurable".
Tautologically false: when "you can't afford it" because there isn't enough money to pay for it, you cannot in fact buy it.
Of course, but there are some markets that are unsustainable from a cost perspective, to the consumer and the provider.
> And there is plenty that can be done to reduce the fire risk to bring premiums down.
Agreed, this should be the priority -- really my point is that it has nothing to do with regulation or lack of, not that I would be unsupportive of requiring that all homes in high-risk areas be built up to a more strict code.
Can a nuclear plant operator get insurance against the costs of a nuclear meltdown?
The costs of the Fukushima meltdown are reportedly $200 billion. Offering a policy with a downside that big would basically be gambling the entire company.
An insurance company can't pay out more money than they have.
Imagine I'm the CEO of an insurance company with $50 billion in assets, and you're a customer wanting to insure against a risk with a 0.1% chance of happening.
If you want the insurance to cover a payout $10 million, the expected value is $10k so if you're willing to pay a premium of $11k I'm happy to do business with you.
If you want the insurance to cover a payout of $100 billion, the expected value is $10 million. But it doesn't matter if you're willing to pay a premium of $11 million, $20 million, $100 million. Because I don't have $100 billion, I can't tell you I'll pay out $100 billion.
Sure, reinsurance exists - but that relies on there being some other insurance company around that can eat a $100 billion loss. Not many fools who'd take a gamble with that much downside.
In your follow-up example, they could reinsure much of the $200B so that they're only liable for a small(er) part of the losses.
The calculation is thus whether they can pay the premiums on the excess (and accept reinsurers' contractual terms) and still make money.
Looking to insurers—and the market generally—to solve the climate crisis is a fool's errand. We need to actually fight the causes if we want real progress.
https://www.architectureanddesign.com.au/editorial/features/...
The structures are essentially fire resistant and with appropriate local control of vegetation make it entirely possible to avoid fire loss.
From a single family perspective, there will be a lot of tragic stories of people who are in an impossible situation with regards to moving.
Seems like a good thing for the insurers if the state takes only the risks. It means operating the business at the very limit of how much profit you can extract from it knowing failure is cost free. Safety nets only take the beating and the falls. So if you're going to be the safety net, you're probably better served by running the business yourself.
I get helping out up to a ceiling but not unlimited liability from the state, guaranteeing an insurer is always solvent. How do you keep bad actors out of the "state guarantees you stay solvent" business?
> regulation to help ensure the solvency of insurers
The only way to ensure solvency is for the state/people to bail them out as needed. That's not a business, that's literally privatizing the profits and socializing the costs.
It's clear that if the insurers themselves are tasked with ensuring their own solvency it would be prohibitively expensive, so they'll pack their things and go.
> It's clear that if the insurers themselves are tasked with ensuring their own solvency it would be prohibitively expensive
Why is that? Sure, a massive event like the Palisades fire might cost $40bn (in a functioning insurance market — we’ll see how much of this gets eaten by homeowners with insufficient coverage in the broken CA market), but this was still a low probability event, it ought to be spread among 10k policies or so, giving a few million dollars per policy. At a (wildly made up) risk of 1% per year of such a loss, that’s $40k per year even before accounting for the fact that these costs get shared by policies covering homes that weren’t in the Palisades. This is expensive but in line with what property taxes ought to be, and it’s manageable. And would be lower if homes were updated to meet modern WUI fire codes.
The real issue is that CA did not allow insurers to set premiums appropriately, so the insurers either get screwed or refuse to issue the policies. That was (AFAICT) the actual problematic regulation, and CA is trying to roll it back.
Deposit guarantees have a ceiling, and in the US that's about three times lower than the median CA home value. It also pays out after the bank is no longer solvent. That kind of regulation does not (and here I am quoting it for the third time) "ensure the solvency of insurers", or banks in your example. Which was specifically what I replied to.
But those who decided to build out of fireproof materials and install a sprinkler system, now have an almost worthless home, since it's now located in a barren wasteland, and the insurance won't be paying out since your house wasn't burned down.
There is an absolute incentive to make sure that if any disaster destroys the region, that you aren't the only one to survive.
Equally, the land hasn't moved. If people wanted to live in the LA hills before the fires, they still will now. Certainly the prospect of a fire will reduce the value, but it won't make it zero.
If, in the long term, the probability of having your house in the LA hills burn down over a given 5-year span approaches 1, the desirability of homes there is not just going to be down over the short or medium term.
There are very little materials able to prevent a house from getting burned by wildfire. In my experience, unless you remove all the house opening and make the wall and roof out of concrete you are doomed because heat will find a way in and fire will take from the inside.
Tile roofs and brick walls survive both easily (standard european construction).
Timber frame, plastic/wood on the outside, asphalt roof shingles, etc would obviously not survive. Which is why a few houses survived.
I think you've answered your own question there.
Concrete is cheap. My house is made from it. Also I have metal shutters on the outside of the windows.
But also, from what I've seen, materials are not the primary cost of contstruction. If you took this plot of land, looks like 20 meters by 40 meters to me, the street view photo from before the fire looks like the building was 3 stories including the garage so let's say 10m tall: https://maps.app.goo.gl/XydopyQorcmgscPD8?g_st=com.google.ma...
8000 cubic meters to fill the entire volume with solid concrete; I think concrete costs $80-$150 per cubic meter for a total of about $640k-$1.2M, while the pre-fire sale prices for that zip code were about $3.8M: https://www.realtor.com/realestateandhomes-search/90272/over...
Metal shutters is also uncommon, it's usually PVC.
What country you live in ?
Concrete is cheap but the steel used to reinforce it are not and concrete not reinforced is worth nothing so I don't know about your estimate.
Germany.
And there's rebar in the concrete of my house, yes.
And my shutters are metal.
Rebar adds to the cost, sure, but not as much as you think. Based on the high estimate of this price range, $4.41/sqft: https://estimatorflorida.com/cost-of-rebar-installation/
… and having a property that fully encloses the entire previous example property boundary to a height of 10 meters, with full floor covering for 3 floors plus the roof all with rebar, that's only adding about $209k to the previous number: https://www.wolframalpha.com/input?i=%28%28800+*+4+%2B+%2810...
So, even with the largest possible structure fitting the same envelope, and the expensive end of the range for rebar, nowhere near the sale price of the property. Reducing this to the scale of the actual building that was there, nearly halves the cost of the rebar from 5% to 3% of the sale price, and the concrete (assuming 50cm thick walls and floors) in the range of 96-180k or 2.5-4.7% of the sale price.
It's *everything else* besides materials that makes houses expensive.
Given the low prices of adding reinforcement, the lesson from the Romans about getting by without reinforcement in concrete is more of an interesting side-note rather than a core point: https://en.wikipedia.org/wiki/Roman_concrete
The price drop might be a bonus due to the insane CA property taxes.
A lot of people seem to automatically expect to be insured against the second risk when they insure themselves against the first, but it is not obvious to me that this should be so. At the very least, that should be written explicitly in the contract and priced accordingly. But I'm also not sure it is actually possible for an insurance company to reasonably price it, as this is not the kind of predictable, reproducible risk that insurance is usually well suited for.
You're comparing risks and costs. The first is stochastic. The second can be almost completely controlled by renewal and rate-increase frequencies as well as coverage limits.
How do you work around wildfire ? I guess you could make a bunker like house, all in concrete with very little window.
Rich LA properties are going to look like Albania lol
For reference Albania has thousands of bunkers all around its countryside.
Fireproofing. It isn't totally a coïncidence that the fire stopped at the urban boundary. Urban fires used to be common. We made them rare because our cities are productive enough to be worth fireproofing.
Blaming the insurers is trying to financially engineer one's way out of a physical problem.
[1] https://www.renewableenergyworld.com/power-grid/outage-manag...
[2] https://www.nytimes.com/2025/01/15/business/economy/los-ange...
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