Although these are extraordinary incidents, they are becoming more common, prompting many Golden State residents to struggle to find insurance for homeowners.
A recent report predicts that the risk of wildfires in California will continue to rise over the next 30 years from a deadly combination of higher temperatures and lower than normal rainfall. This leaves homeowners in moderate to low-risk communities concerned about protecting lives and property for a problem they probably thought would never affect them. Link this to the struggling insurance market and the crisis may be on the horizon.
Officials in California have passed a number of laws and regulations to provide options to cover riskier properties and maintain relative affordability, including the implementation of proposal 103 in 1988 and the creation of the FAIR plan in 1968. Proposal 103 requires insurers seek “prior approval” for changes in the course from the California Department of Insurance (DOI). The FAIR plan offers residents a temporary, last resort for insurance, often at higher prices and with less stable coverage.
If California wants to see a better-functioning insurance market, it must be careful in applying additional regulations that have led insurers to flee the state. This year alone has seen the departure of American Insurance Group from California and a significant reduction in insurance offers from Chubb. These are two of the largest insurers in the country and both cited burdensome regulations in their decisions.
To aggravate the problem, California DOI Commissioner Ricardo Lara proposed additional regulations for insurance companies in February, forcing them to make public models and tools for assessing the risk of forest fires – an intellectual property issue. In particular, the proposed regulation states that risk modeling will be made public, whether the information and methods are “confidential, proprietary or trade secret”. This requirement would discourage insurers from using their most effective tools, which would lead to market stagnation and reduced innovation.
Lara’s proposal also lists many “mandatory factors” that insurance companies must take into account when assessing the risk of forest fires on a property, including the property being part of a “Community Fire Risk Reduction Community”. Insurers opposed this, noting that the name is new and should not be a mandatory risk assessment factor when its experience is unproven.
Some lawmakers are trying to stifle the already struggling market even more. Bill 1755 obliges insurance companies to provide policies to all homeowners whose properties are subject to certain mitigation efforts, regardless of any other factors.
The couple’s growing regulation with a growing risk of forest fires and the incentive for insurance companies to provide policies in California are drastically declining. Wildfire’s losses will cost suppliers up to $ 13 billion in 2020 alone, a number that is likely to rise. If insurance companies feel that regulatory pressures are getting stronger, they may decide to leave the state.
To provide access to insurance for its residents, California needs to focus primarily on mitigating forest fires, and focusing on prescribed burns is a good starting point. Commissioner Lara sent a notice to insurance companies in April, proposing to increase coverage for prescribed burns, which reduce the likelihood and severity of forest fires by methodically burning dried leaves and brushes. The data show that these burns are effective in combating the risk of forest fires and the method has been used for centuries.
Educating homeowners about their vulnerability to forest fires and methods to promote sustainability is also vital. A number of steps – many of which are taken into account when insurers issue policies – reduce the risk of damage from forest fires, such as clearing vegetation and pruning trees.
Effective forest fire mitigation is the most attractive solution for both insurers and consumers. Insurance provides homeowners with financial security and is their first line of defense when a tragedy occurs. The California DOI needs to focus on increasing the appetite of insurers to work in the state. This will increase competition and expand the group of risks, giving more opportunities at a lower cost.
Caroline Melier is a Finance, Insurance and Trading Fellow at the R Street Institute.