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 forest fire in January Big Sur and geographically unusual fire in Lake 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 forest fires in California will continue to grow 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 enacted 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 establishment of the FAIR plan in 1968. Proposal 103 requires insurers to seek “advance approval ”for changes in interest rates from California Insurance department (DOI). The FAIR plan offers residents a temporary, last resort for insurance, often at higher prices and with less stable coverage.
If California would like to see a better functioning insurance market, must be careful in the application of additional regulations that led to the flight of insurers from the state. Only this year he saw 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 matters is the DOI Commissioner in California 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 – a matter of intellectual property. 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.
Link the regulation of the bubble to the increased risk of forest fires and the incentive for insurance companies to provide policies California decreases dramatically. Losses from Wildfire cost suppliers up to $ 13 billion only in 2020 – a number that is likely to increase. If insurance companies feel that regulatory pressures are getting stronger, they may decide to leave the state.
In order to provide access to insurance for its residents, California the focus should be 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 an associate in finance, insurance and trade in R Street Institute.