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Wildfires burning through Southern California are turning entire neighborhoods into ash, decimating expensive properties and exacerbating an insurance crisis that precedes the wildfires.
Costs are mounting quickly as the Los Angeles area disaster continues to unfold, with AccuWeather’s Global Weather Center now estimating total economic damages of between $250 billion and $275 billion. The insurance industry alone is expected to incur about $30 billion in damages, according to new data released by Wells Fargo Securities, costs that in turn could lead to further price hikes for California homeowners.
“I think it’s safe to say, based on history, that when insurers run into the kind of claims they’re going to process here and pay here, they’re definitely going to try to influence rate increases across the state,” Amy Bach, executive. director of the consumer advocacy group United Policyholders, told The Hill.
“There will be some impact on everybody,” Bach continued. “The worst will be in the areas that are already at risk of forest fire.”
Wells Fargo analysts described the $30 billion estimate as a “base case” scenario, noting that damages could range from $20 billion to $40 billion. analysts said about 85 percent of that money would come from homeowner’s policies, while 13.5 percent would be tied to commercial property and 1.5 percent to vehicles.
“There have never been losses as large as these in terms of the number of structures,” Bruce Babcock, a professor of public policy at the University of California, Riverside, told The Hill.
Noting that the damage from previous fires “pales in comparison to the losses,” he said the current situation “can do nothing but make the problem worse for California.”
The Golden State has been hit by a number of insurers pulling out and raising rates in recent years as the threat of wildfires, and the costly damages they can incur for insurers, has increased.
California officials are trying to mitigate the crisis with new requirements for insurers to cover areas at high fire risk, and those caught up in this month’s devastating wildfires.
A few days after the fires began, California Insurance Commissioner Ricardo Lara ordered the one year moratorium on cancellations and non-renewals of policies in the affected areas. The companies prohibited by mandate to remove or refuse to renew the policies of properties located within or adjacent to fire perimeters.
Lara also issued one on Monday emergency declaration for Los Angeles and Ventura counties, requiring strict oversight of out-of-state adjusters who helped handle the high volume of insurance claims. All unlicensed adjusters must be supervised by a qualified and trained California adjuster, insurer or manager, the statement said.
“I am doing everything in my power to streamline the recovery process during this unprecedented time, so that residents can begin to piece their lives back together after these devastating wildfires,” Lara. he said in a statement.
Coincidentally, the flames started about a week after new wildfires started.insurance regulationsdefended by Lara, who has tried to reverse the exodus of insurers from the state.
The regulations now oblige companies to insure properties in vulnerable areas aarate equivalent to 85 percentof their California market share, increasing that coverage in 5% increments every two years, until they reach that threshold. In turn, the rules also allow companies to take into account the costs of reinsurance (insurance for insurers) in their rate determinations.
The commissioner’s office touted the regulations as both safeguarding consumer interests and building a more resilient market, noting that reinsurance has become an “essential component of insurance companies operating in areas of ‘high risk and with difficulties’.
The rules serve as an update Proposition 103a 1988 ballot measure created “to protect consumers from arbitrary insurance rates and practices” and to foster a competitive and fair marketplace. By issuing the new rule, Lara closed a loophole in the measure: the ability of insurers to request rate hikes without having to cover all Californians.
California’s is also included in the new regulations first use of “catastrophe modelling”, localized risk simulations based on historical analysis and probabilistic calculations of future such events. Whether relying on these models, which have long been used by other states, will end up lowering or raising rates for consumers remains a point of contention among stakeholders.
Overall, Bach said he sees the regulations as a reason why “insurers don’t pile in and say, ‘Look, this is why we can’t do business here.’ We’re out.” The changes, he added, may not “bode well for consumers in terms of affordability,” but they do “in terms of us continuing to have a market.”
She and other experts have expressed unease about a potential increase in reliance on CaliforniaFAIR Plan: a basic but expensive “quasi-private”.insurer of last resort” available to residents when traditional coverage is not.
Some concerns center on the potential for rising claims to overwhelm the FAIR plan, which includes all licensed California property insurers and is funded by policies sold to customers. After the wildfire seasons of 2017 and 2018, for example, use of the plan surged amid rampant policy cancellations and rising insurance premiums, as June 2024 report found.
Bach described the FAIR Plan as strong as member insurers, who face additional exposure risk by participating. But he stressed that no major insurer has left California and that the plan has asserted the solvency of both its finances and reinsurance.
“What’s still up in the air is, will they have to charge their member companies an assessment once they go through their own reserves, in addition to their reinsurance?” Bach asked, noting that this had never happened before.
“If that happens, I’m sure the insurers won’t be happy about that: having to put up money for the liabilities of the FAIR plan, on top of the claims they got on their own books,” Bach added.
One place where Bach said Washington could ideally play a bigger role is in reinsurance, since it’s “such a big factor” in the rates insurers charge customers. As such, having “a public reinsurance alternative for state insurers of last resort” could be critical, he explained.
But he acknowledged that “the kind of federal solutions that we’re starting to talk about and look for may not be viable with the incoming administration and Congress.”
Philip Mulder, an assistant professor at the University of Wisconsin School of Business, expressed concern that the ongoing fires could make Lara’s adjustment period to the new regulations more difficult.
Acknowledging the growing reliance on FAIR, Mulder described the plan as a “complicating factor” in a state that otherwise embraces pro-consumer regulation. California leadership, he added, had warned that the plan was “not adequately capitalized to meet the significant loss.” events”.
At the end of last week, lawmakers introduced a law which would try to reduce some of FAIR’s unknowns by issuing catastrophe bonds to help finance the cost of insurance claims. The bill would “relieve some of the uncertainty that FAIR plan policyholders may face as a result of this tragedy,” said California State Assemblywoman Lisa Calderon (D). he said in a statement at that time.
While many questions remain, Mulder said he saw Lara’s new rules as an overall improvement, especially “given the growing nature of wildfire risk and the demonstrated reluctance we’ve seen by insurers to do business in many of these parts of California.”
However, Babcock of the University of California, Riverside, expressed doubt that insurers would want to write policies in the highest-risk neighborhoods, and that the only way to accept that is by charging “the people in the neighborhoods low-risk enough to make up for it.” for their future losses.”
“The only way to keep the insurance industry willing to write in high-risk areas is for the rest of the policyholders to collect even more money,” he said.
As for the new regulations, Babcock questioned whether insurers will actually be able to rate specific neighborhoods for risk and then charge higher premiums to those areas accordingly.
“I’m an economist and I like people to pay at their own risk,” he said. “I don’t really think it’s up to us to socialize risk, because all you’re doing is encouraging people to take on additional risk.”
As for his personal situation, Babcock noted that even though he lives in a low-risk area, his insurance premium has increased more than 50 percent in two years.
“Insurance is expensive and it’s the first harbinger of the financial consequences of climate change,” Babcock said.
