Wildfires' Devastating Impact: An Insurance Nightmare Unfolds

Wildfires are becoming an insurance nightmare for residents of California, with insurance companies turning away from the state due to the increasing risk and cost of rebuilding. In the last few years, thousands of homeowners have lost their insurance policies as insurers pull out of areas at risk of fire damage. The California Department of Insurance reported that State Farm, Allstate, and other insurers declined to renew roughly 350,000 policies in high-risk areas since 2015. The situation has become so dire that multiple counties have requested a state of emergency be declared due to the difficulty of obtaining home insurance.

Wildfires have caused billions of dollars in damages in California over the past few years

The cost of wildfires in California has been rising, with the state's 2020 fire siege being the most destructive year on record in terms of acres burned. Over 4.3 million acres burned in 2020, with the fires causing over $12 billion in damages, including over $10 billion in property damage and $2 billion in fire suppression costs. The insurance industry is yet to release an estimate of the damages for the 2023 fire season, but the costs are expected to be high.

The increasing frequency and intensity of California wildfires in recent years have been attributed to a combination of more than a century of poor forest management and higher temperatures resulting from climate change. Megadroughts and rising temperatures, aggravated by climate change, have increased the frequency and intensity of these wildfires. As a result, insurers are pulling out of areas at risk of fire damage or stopping insuring homes altogether, leaving homeowners struggling to find coverage.

The California FAIR Plan, a government-sanctioned association of insurers, currently covers fire damage for the highest-risk properties. However, FAIR Plan insurance only covers up to $3 million in damages, which may not be sufficient given the increasing cost of wildfires. The average annual premium on a homeowner policy plus FAIR to cover fire now costs around $2,500 a year, three times higher than it was three years ago.

The situation has been described as a "wildfire insurance crisis" by California Insurance Commissioner Ricardo Lara, who has implemented a one-year moratorium on non-renewals to allow for the development of a more substantial solution for the roughly 1 million homeowners in zip codes adjacent to previous wildfires.

Insurance companies are losing money and pulling out of high-risk areas

Wildfires have cost insurance companies in California more than $24 billion in the past two years, with the figure expected to be even higher for 2024. As a result, insurance companies are losing money and pulling out of high-risk areas.

In California, insurance companies have paid out a record $15.4 billion in losses in 2017 and $13.6 billion in 2018, with losses never exceeding $5 billion annually before 2017. The losses have increased exponentially compared to ten years ago, and the situation is not improving. Since 2017, wildfires have caused over $30 billion in damage across the state.

Insurers are losing money due to the increasing cost of wildfires, which are becoming more frequent and severe due to climate change. As a result, insurance companies are pulling out of high-risk areas and refusing to renew policies for customers in these areas. This has left many homeowners struggling to find insurance coverage and has led to a crisis in the California insurance market.

In 2019, the California Department of Insurance reported that State Farm, Allstate, and other insurers declined to renew roughly 350,000 policies in areas at high risk for wildfires since 2015. Additionally, 33,000 policies were not renewed by insurers in zip codes affected by major wildfires. The situation has become so dire that multiple counties have requested state officials declare a state of emergency due to the difficulty of obtaining home insurance.

The insurance industry's response to the increasing losses has been to pull back from certain areas or leave the state altogether. This has left many homeowners in high-risk areas struggling to find insurance coverage and has driven up the cost of insurance for those who can obtain it. The average annual premium for a homeowner's policy has tripled in the last three years, increasing from $2,500 to $7,500 in some cases.

Homeowners in these areas are struggling to find insurance coverage

Wildfires are becoming an insurance nightmare for homeowners in high-risk areas, with many struggling to find coverage. In California, for example, thousands of homeowners have lost their insurance policies in recent years as insurers pull out of areas at risk of fire damage.

In the face of this crisis, homeowners in these areas are facing a challenging insurance landscape. They are forced to scramble to find coverage from regular insurance providers or turn to government-sanctioned plans as a last resort. These plans, known as FAIR (Fair Access to Insurance Requirements) plans, are typically more expensive and offer lower policy limits.

FAIR plans are designed to provide coverage for high-risk properties, but they are often a temporary solution. Homeowners may struggle to find a permanent insurance solution, as many insurers are reluctant to offer coverage in fire-prone areas. This situation has led to increased premiums and limited options for those seeking insurance.

To address this issue, some states have implemented measures to assist homeowners. For instance, California passed a law granting the Department of Insurance emergency powers to keep policies in effect for those in fire-prone areas. Additionally, the California Insurance Commissioner imposed a one-year moratorium on non-renewals, providing a temporary solution while seeking a more permanent resolution.

Homeowners in high-risk fire areas can also take proactive steps to improve their chances of obtaining insurance coverage. These steps include shopping around with multiple carriers, asking neighbors for recommendations, taking advantage of discount opportunities, and reducing their home's fire exposure by implementing fire prevention features.

Insurance premiums are increasing for those who can get coverage

Wildfires have burned nearly 10 million acres of forest and destroyed 39,000 homes in California over the past five years. This has resulted in a crisis in the state's insurance market, with insurers paying out over $30 billion in losses over the past two years. As a result, insurance companies are offering fewer policies, and insurance premiums are increasing for those who can get coverage.

In recent years, many insurance companies have stopped taking on new customers and have increased rates for existing ones. For example, Allstate has stopped writing new policies in California, and Liberty Mutual has raised rates and not renewed the policies of 17,000 long-term customers. State Farm, California's largest insurer, has also stopped writing new policies and has chosen not to renew 72,000 customers' policies. These actions have left many homeowners struggling to find coverage, with some being forced to turn to the California FAIR Plan, a state-backed insurance plan of last resort.

The situation has become so dire that multiple counties have asked state officials to declare a state of emergency due to the difficulty of obtaining home insurance. The First Street Foundation, a US nonprofit that studies the financial stakes of climate risks, has labeled some parts of California as "essentially 'uninsurable.'" Homeowners in high-risk areas are already feeling the impact of this crisis, and the problem is spreading.

The increase in insurance premiums is due to several factors, including the costlier climate-fueled fires, outdated regulations of the insurance industry, and inflation. Climate change is producing conditions that make wildfires more severe and the wildfire season longer, leading to higher costs for insurance companies. Outdated regulations, such as Proposition 103 in California, which allows the state's Department of Insurance to suppress insurance rates, have also contributed to the increase in premiums. Insurance companies are unable to increase rates in response to higher costs, leading to some companies choosing to restrict their offerings or leave the market altogether.

Inflation has also played a role in the increase in insurance premiums. Higher costs for labor and materials have driven up the insured value of homes and increased average claim payouts. With materials costs continuing to rise, insurance companies are facing higher costs for repairs and rebuilding homes. As a result, they have passed some of these costs on to consumers in the form of higher premiums.

Outdated regulations are contributing to the crisis

Wildfires have burned nearly 10 million acres of forest and destroyed 39,000 homes in California over the last five years, providing a glimpse at just how dire the state’s climate crisis has become. As a result, insurance companies are offering fewer and fewer policies, and many homeowners are finding it harder to obtain insurance. This crisis has been years in the making, and outdated regulations are a significant contributing factor.

In 1988, California voters narrowly passed Proposition 103, a ballot measure that gave the state's Department of Insurance the authority to suppress insurance rates that it deemed excessive. This law also requires insurers to justify rate increase requests for future wildfire losses based on their average annual wildfire losses over the last 20 years. As wildfire losses have increased exponentially, this essentially asks insurers to take on more risk than they can compensate for in premiums. As a result, many insurance companies have pulled back from certain areas or left the state altogether.

The impact of this regulation is evident in the data. From 2015 to 2018, the number of new and renewed homeowners' policies fell by 8,700 in the 10 counties with the most homes in high or very high-risk areas. These counties saw a steady increase in new FAIR Plan policies, which provide insurance as a last resort for homeowners who cannot find coverage on the voluntary market. Nearly 57% of new FAIR Plan policies are now written in State Responsibility Areas, up from 47% in 2015.

The California Department of Insurance has attempted to address this issue by issuing moratoriums barring insurers from canceling or non-renewing policies in wildfire-prone areas for up to one year. However, these measures do not address the underlying issues caused by outdated regulations like Proposition 103.

The state of California is now making major reforms to its insurance regulations for the first time in over 30 years. These reforms include allowing insurance companies to use wildfire risk models that allow for future projections and creating a public risk model to hold private models accountable. These steps should make insurance pricing more accurate and help bring insurance supply back to the market.

Frequently asked questions