Californians are in the midst of an environmental crisis as the frequency and intensity of forest fires worsen. This year alone, it sparked an unusual January wildfire in Big Sur and a geographically unusual fire in Laguna Nigel. 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.
California officials 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 needs to be careful about implementing 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.
Complicating the matter, 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, leading to market stagnation and reduced innovation – a net detriment for homeowners.
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 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. He was introduced by D-Marin County MP Mark Levine in February and referred to Commissioner Lara in March.
The couple’s growing regulations with a growing risk of wildfires and the incentive for insurance companies to provide policies in California are declining dramatically. Wildfire’s losses will cost suppliers up to $ 13 billion in 2020 alone, a number that is likely to increase. 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. Data from the Center for Insurance Policy Research (CIPR) shows that these strategies are very effective, reducing the risk of forest fires by up to 78 percent when combined with structural home modifications such as fireproof roofs, ventilation screens and other improvements. This is an area where public-private partnerships can thrive, with the state and insurance companies working together to educate and promote sustainability efforts.
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 range of risks, providing consumers with more opportunities at a lower cost.
Effective forest fire mitigation is the most attractive solution for both insurers and consumers. But the beneficial effects of this approach will be eliminated if the constant flow of new regulations makes the business unviable. Regulation often has unintended consequences, and when it becomes so burdensome that insurers cannot support communities, everyone loses.
Caroline Mellier is a Fellow in Finance, Insurance and Trade at the R Street Institute, a public policy research organization committed to promoting free markets and limited, effective government.