Californians are in the midst of an environmental crisis as the frequency and intensity of wildfires worsen. This year alone produced an off-season wildfire in January in Big Sur and a geographically rare fire in Laguna Niguel. While these are outlier incidents, they are becoming more common, leaving many Golden State residents scrambling to find homeowners insurance.
A recent report predicts that California’s wildfire risk will continue to grow over the next 30 years from a deadly combination of higher temperatures and lower than normal rainfall. This leaves landlords in moderate to low risk communities anxious to protect life and property from an issue they probably assumed would never affect them. Add to that a struggling insurance market and a crisis could be on the horizon.
California authorities enacted numerous laws and regulations to provide coverage options for riskier properties and maintain a relatively affordable price, including the implementation of Proposition 103 in 1988 and the creation of the FAIR plan in 1968. Proposition 103 requires insurers to seek “prior approval” for rate changes from the California Department of Insurance (DOI). The FAIR plan offers residents temporary insurance of last resort, often at higher prices and with less robust coverage.
If California wants to see a better performing insurance market, it needs to be careful about implementing additional regulations, which have led insurers to flee the state. This year alone saw the departure of American Insurance Group from California and a significant reduction in insurance offerings from Chubb. They are two of the largest insurers in the country and both cited burdensome regulations in their rulings.
Compounding the problem, California DOI Commissioner Ricardo Lara in February proposed additional regulations on insurance companies, requiring them to make wildfire risk assessment models and tools public – a matter of intellectual property. Specifically, the proposed rule 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, net harm to owners.
Lara’s proposal also lists numerous “mandatory factors” that insurance companies must consider when assessing a property’s wildfire risk, including property that is part of a “community reduction of fire risks. Insurers disputed this, noting that the designation is new and should not be a required factor for risk assessment when its track record is unproven.
Some lawmakers are trying to further strangle the already struggling market. Assembly Bill 1755 requires insurance companies to provide policies to all property owners whose properties undergo certain mitigation efforts, regardless of any other factors. It was introduced by D-Marin County Assemblyman Marc Levine in February and returned to Commissioner Lara in March.
Couple hot air ballooning regulations with increased wildfire risk, and the incentive for insurance companies to provide policies in California drops dramatically. Losses from wildfires have cost suppliers up to $13 billion in 2020 alone, a figure that is expected to rise. If insurance companies sense regulatory pressure is tightening, others may decide to leave the state.
To ensure access to insurance for its residents, California should primarily focus on wildfire mitigation, and focusing on prescribed burns is a good place to start. Commissioner Lara sent a notice to insurance companies in April suggesting they increase coverage for prescribed burns, which reduce the likelihood and severity of wildfires by methodically burning dried leaves and brush. Data shows that these burns are effective in combating the risk of wildfire, and the method has been used for centuries.
It is also essential to educate property owners about their vulnerability to wildfires and methods to promote resilience. A number of steps, many of which are considered when insurers issue policies, reduce the risk of damage from wildfires, such as clearing vegetation and pruning trees. Data from the Center for Insurance Policy Research (CIPR) shows that these strategies are highly effective, reducing wildfire risk by up to 78% when combined with structural home modifications such as skylight roofs. fire, ventilation screens and other improvements. This is an area where public-private partnership can thrive, with the state and insurance companies working together to educate and promote resilience efforts.
Insurance provides homeowners with financial security and is their first line of defense in the event of a tragedy. The California DOI needs to focus on increasing the appetite of insurers to operate in the state. This will increase competition and expand the risk pool, giving consumers more options at lower cost.
Effective wildfire mitigation is the most attractive solution for insurers and consumers. But the beneficial effects of this approach will be undone if a steady stream of new regulations render companies unviable. Regulation often has unintended consequences, and when it becomes so burdensome that insurers cannot support communities, everyone loses.
Caroline Melear is a finance, insurance, and commerce fellow at the R Street Institute, a public policy research organization committed to promoting free markets and limited, effective government.