Every California home owner wants low insurance rates. As an insurance broker, I want the lowest price for all my clients, whether they live in the city, near the forest or in the mountains. However, I would reasonably accept higher rates if they lead to a healthier insurance market and avoid the fear that so many Californians face when their coverage lapses.
Increasingly, Californians are left with no choice but to accept the California FAIR Plan, the insurer of last resort, and the usually higher rates that come with it.
The FAIR plan provides essential fire insurance coverage when traditional insurance is not available, often for properties that other insurers refuse to cover because they are considered high risk. The FAIR plan is intended to serve as a temporary safety net until traditional insurance options become available.
The increased risk is real. Since 2013, the number of acres burned per wildfire and the number of structures damaged per acre burned have both increased.
But as our state suffers from persistent drought and other impacts of climate change, a growing number of homeowners are finding that they live in areas now considered high-risk for wildfires, and the FAIR plan is their only option.
The California Department of Insurance (CDI) has the authority to approve or deny rate increases. Still, CDI has resisted approving rate increases that insurance companies say are needed to cover the growing risk of wildfires in many parts of the state. As a result, insurance rates have not kept pace with the risks and costs that insurers face. This needs to change.
The increased risk is real. Since 2013, the number of acres burned per wildfire and the number of structures damaged per acre burned have both increased, indicating California’s wildfires have become more severe and impactful, according to Milliman, a global actuarial and consulting firm. All eight of California’s largest fires on record have occurred in the past five years alone.
The impact of wildfires is devastating to the insurance industry. From 2016 to 2019, insurers racked up $37 billion in losses due to the California wildfires, far exceeding the $32 billion in premiums paid by homeowners.
Insurance works when premiums are sufficient to cover losses in the event of a disaster. As the risk and scale of the disaster increase, so do the rates. Most insurers seek to manage risk by spreading coverage across a geographically diverse set of properties so that risk is limited to a small portion of their portfolio.
As an insurer of last resort, the FAIR plan is left to manage an increasingly concentrated high-risk pool.
Although climate change has greatly increased the risk of disasters, California’s levels have been kept artificially low, which is evident compared to the rest of the nation.
With rate proposals supporting CDI, many insurers are refusing to add or renew policies to thousands of homeowners and are shunning concentrated, high-risk properties entirely to manage the increased risks and potentially catastrophic costs associated with worsening wildfires. As risks and costs continue to rise for insurers, some companies are considering pulling out of California altogether, putting even more financial strain on the remaining market.
As an insurer of last resort, the FAIR plan is left to manage an increasingly concentrated high-risk pool. Because the FAIR plan has a high concentration of high-risk policies, its policies tend to be more expensive than the coverage provided by traditional carriers.
CDI has taken some steps to address the insurance crisis, such as imposing a moratorium on the non-renewal of homeowners’ policies in or around areas declared a state of emergency by the governor.
The insurance commissioner is also trying to force the FAIR plan to expand its coverage, an issue currently in litigation, while continuing to keep rates artificially low. Expanding the FAIR plan would stifle competition and could drive other insurers out of the market, meaning even higher rates for many homeowners.
California’s insurance crisis will continue unless the California Department of Insurance approves rates that reflect the true cost of increased risk. Such action will make the market more competitive to the benefit of all consumers.
Ultimately, a better balance between affordability and availability of insurance will lead to a healthier market for coverage and a stronger state.
Editor’s note: Aurora Mullett is the owner of Intrinsic Insurance Services, an independent insurance broker based in Orangevale, California.