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Wildfires Hasten Another Climate Crisis: Homeowners Who Can’t Get Insurance

As wildfires burn homes across California, the state is also grappling with a different kind of climate predicament: How to stop insurers from abandoning fire-prone areas, leaving countless homeowners at risk.

Years of megafires have caused huge losses for insurance companies, a problem so severe that, last year, California temporarily banned insurers from canceling policies on some 800,000 homes in or near risky parts of the state. However, that ban is about expire and can’t be renewed, and a recent plan to deal with the problem fell apart in a clash between insurers and consumer advocates.

Insurers are widely expected to continue their retreat, potentially devastating the housing market if homes become essentially uninsurable.

“The marketplace has largely collapsed” in those high-risk areas, said Graham Knaus, executive director of the California State Association of Counties, which has pushed state officials to address the problem. “It’s a very large geographic area of the state that is facing this.”

The insurance crisis is making California a test case for the financial dangers of climate change nationwide, as wildfires, floods and other disasters create economic shocks well beyond the physical damage of the disasters themselves. Those changes have already started to affect home prices, the mortgage industry and the bond market.

In California, the wildfires of the past few weeks have made the problem more urgent. The state has battled more than 875 fires since mid-August, which have burned almost 1.5 million acres and destroyed more than 2,800 structures, according to Cal Fire, the state fire agency. As of Monday, almost 40,000 people remained unable to go back to their homes.

As a result, insurers now face the prospect of another brutal year of losses.

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Credit…Marcio Jose Sanchez/Associated Press
Credit…Josh Edelson/Agence France-Presse — Getty Images

Around the world, climate change has made storms more powerful and frequent, increased the intensity of droughts and contributed to more extreme wildfires, and, as a result, many insurance companies say their premiums are now set too low to cover the growing losses. But raising premiums, which are often closely regulated, can create a headache for officials. California and other states have the authority to reject or reduce rate increases, and they often face pressure from voters to do so.

The result is a dilemma for governments. Either let rates rise, squeezing homeowners, or take the chance that more insurers will pull back from vulnerable areas, as many across the West are doing already. Without insurance, banks won’t issue mortgages, making homes harder to buy or sell.

The challenges are especially pronounced in California, where regulations lean toward consumer protection. The state forbids insurance companies from setting rates based on what they expect in future damages. Insurers are allowed to set rates only based on prior losses.

Regulators also forbid insurers from passing along the costs of buying their own insurance, which they do to soften the blow of unexpectedly big losses. As wildfires get worse, those costs for insurers are going up as well.

Both rules were designed to guard against higher rates. But in the age of climate change, insurers say those rules have prevented them from keeping up with wildfire damage.

“From homeowners’ point of view, this is scary,” said Char Miller, a professor of environmental analysis and history at Pomona College near Los Angeles. But for insurance companies, he said, not covering high-risk homes reflects a straightforward logic: “Why am I insuring something that I know is going to be destroyed?”

The problem has become so bad that the state’s insurance commissioner, Ricardo Lara, last December banned companies from dropping people in or near ZIP codes struck by recent wildfires, calling the situation a “crisis.” The move, which covered at least 800,000 homes around the state, marked the first time his office had used that authority.

The ban was never meant to be a permanent fix. It lasts just 12 months and can’t be extended.

Credit…Josh Edelson/Agence France-Presse — Getty Images
Credit…Marcio Jose Sanchez/Associated Press

And data suggests that insurers have continued to drop customers. The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50 percent between the start of 2019 and June 2020, to almost 200,000 households.

That program, called the FAIR Plan, covers fewer types of damage than private insurance policies and caps policies at $3 million. Yet even that plan is getting more expensive: It has asked the state for permission to raise its rates by 35 percent.

Still, officials have struggled to find a solution that both insurers and consumer advocates will accept.

This spring, state lawmakers introduced a bill they described as a compromise: In areas exposed to wildfires, insurers would be allowed to incorporate climate predictions and other costs into their rate requests, in return for making coverage more available and offering discounts to people who take steps to reduce their home’s vulnerability to wildfires.

The bill was meant to address the needs of homeowners in what experts call the “wildland-urban interface,” or W.U.I. — places at the edge of the forest, where the risk of wildfires tends to be highest but where housing costs are often lower than in urban areas.

“My main concern is those folks in the W.U.I., who are having a very difficult time getting insurance,” said State Senator Susan Rubio, who represents the southeastern part of Los Angeles County and was one of the bill’s authors. “To do nothing, that’s just not an option.”

Insurers supported the change, as did the association of counties. So did the union representing firefighters at Cal Fire, many of whom live in fire-prone places.

“It’s affecting our members, being able to get insurance for the areas they can afford to live in,” said Tim Edwards, president of Cal Fire Local 2881, which represents more than 6,500 firefighters. He said more than 100 of his members had lost homes to wildfires in the past five years.

But the bill faced strong opposition from consumer groups.

Carmen Balber, executive director of an organization called Consumer Watchdog, called the bill “an insurance industry wish list.” She said the state should at least make insurers offer home insurance to anyone who takes steps to mitigate their wildfire risk, such as clearing brush around their home.

“If insurers want to sell in the best parts of California,” Ms. Balber said, “they need to sell in the riskier parts.”

Credit…Noah Berger/Associated Press
Credit…Josh Edelson/Agence France-Presse — Getty Images

The consumer groups prevailed. Last month, the State Senate stripped most of the provisions from the bill, instead directing the insurance commissioner to review the current rules and report back to the legislature in two years. Even that pared-back measure failed to come up for a vote by the time the annual legislative session ended Monday night.

“It was effectively gutted,” said Rex Frazier, president of the Personal Insurance Federation of California, which represents insurers. “Despite the fact that half of California is on fire.”

The state’s insurance commissioner said his focus now was working with high-risk communities to reduce their wildfire risk enough that insurers will keep offering coverage without big rate increases. “I will continue to move quickly to tackle the costs and availability of wildfire insurance affecting our state,” Mr. Lara said. “If Californians do our part to protect homes from wildfire,” the industry should respond by agreeing to insure those homes, he said.

But reducing the human and economic toll of wildfires will require deeper reform than just tweaking building codes or encouraging better landscaping, others said. It may also require addressing the shortage of new housing in Californian cities, which has helped push development further into areas at risk of burning, a trend that has continued despite years of severe wildfires.

David Shew, a former staff chief at Cal Fire, said that the spread of houses into fire country used to seem like a reasonable trade-off. “There are great needs to build housing in more affordable areas, which kind of, by default, tend to be these more exposed, fire-prone landscapes, because land is cheaper there,” Mr. Shew said. “There was a feeling that, well, it was worth the risk.”

But as climate change makes wildfires more devastating, that logic seems less obvious, he said. Short of more onerous restrictions on construction in high-risk areas, worsening the statewide housing crisis, there are physical and political limits to how much governments can do to reduce that risk, which means insurance will become more expensive.

“We will never, ever, have enough fire engines to park in every driveway,” Mr. Shew said. “It’s only going to get worse.”