Those looking to insure a new home or property in California may be out of luck — insurance giants State Farm and Allstate have backed out offering wildfire insurance in the state.
Both companies have said they will no longer offer new policies due to climate change-fueled disasters and high building costs. Since 2017, the largest and deadliest wildfires to happen in state history have destroyed more than 50,000 homes, buildings, and other structures in California.
In that time, property owners in areas at high-risk for wildfire have found it increasingly difficult and costly to find adequate insurance to protect their livelihoods. CapRadio’s Vicki Gonzalez spoke with Michael Wara, the Director of the Climate and Energy Policy Program at Stanford University, to better understand how and why we got here and what it means for residents.
This interview has been edited for clarity and length.
Interview highlights
On why two insurance giants may have pulled out of the state
California is an enormously attractive place to write insurance because of the balance of real estate in California — we all know how much real estate costs, and maybe some of it could cost less.
What’s going on is that there’s an interaction between the changing risk of wildfire … and limitations on the rate that insurers can charge for homeowners’ coverage. I think that the perception of risk really changed after 2017 and 2018, as it sure did for me. I live in a Wildland Urban Interface, and I’m much more aware of wildfire risk, as are my neighbors.
[Insurance rates] adjust more slowly than our perceptions or perhaps that a climate model would allow them … [That’s the way homeowners’ insurance] and all property and casualty insurance in California has worked since a ballot initiative passed in the 1980s called Prop. 103. Rates are set by the average losses over the last two decades.
So that means that today, 2017 and 2018 are certainly a part of insurance rates in California, but so are all the years that preceded them where the losses were much less. It’s pretty simple math — you add up the losses over 20 years, and you’re allowed to charge 5% of that.
And if one believes that wildfire in the last five years is qualitatively different from wildfire circa 2003 or 2005, then that price is too low. There were sort of slow adjustments occurring in rates over the last few years … [so the companies] might catch up to the right price … but not if inflation is eating into those gradual increases.
We’ve sort of had this combination of problems that are leading to real availability challenges in the California market.
On how this will affect the market
So the first phase of the wildfire insurance challenge has been, and continues to be, challenges for people that live in high-risk areas in finding available and affordable insurance. But the second phase is what’s happening now. This is different in the sense that this change affects all Californians because most of State Farm’s new rates [are not written] for Wild and Urban Interface areas, but in major urban population Centers of California.
These design features of the California market, in particular, how we handle people who cannot get regular … homeowners’ coverage, that creates exposure for the companies selling insurance in California, no matter what they do. What State Farm and Allstate are doing is just reducing their overall exposure to California because there’s no way to escape the wildfire risk that’s associated with that.
On how wildfires tie in with booming construction costs
I sat on the [Santa Rosa] wildfire commission for the state, and it was heartbreaking. I think that the real consequences of these disasters are profound for communities.
Go to Chico and see the problems that Chico has today with an unsheltered population and just realize that so much of that has to do with the fact that 20,000 units were destroyed overnight in [Paradise] during the Camp Fire. It’s a profound shock to a community and to people.
I think about the kids who go to sixth grade. My kid is in sixth grade … imagine going to school with your friends, and then the next day, your school is wiped off the map, and your friends are dispersed to the winds, and your house burns down. The trauma that creates for families and children.
People are more aware of the limitations of homeowners’ insurance and the need to keep up with the inflation of construction costs. But I also think that people in California are struggling to afford housing, and one way that they can limit their monthly cost of housing … is by limiting their insurance.
The cost per square foot to rebuild has gone up more than 30% since 2020, and that’s much higher than the overall inflation, even higher than food inflation.
Most people wouldn’t realize that unless they’re doing a remodel or something like that, trying to get some work done on their house, and they realize, “oh my goodness, it costs $1,000 a square foot in the Bay Area now to do something, and it used to cost $500 a square foot last time I tried this ten years ago.”
And so there’s that issue … [and so to] point to the problems that occur after a catastrophe like Napa, Sonoma, or what happened in Paradise, where the catastrophe itself causes a run-up in the cost of construction in the region.
On why some folks decide to skip or choose minimal coverage
It's likely that the cost and availability of insurance are leading to more properties going naked. You have insurance if you have a mortgage, but say you're a senior, and you've paid off your mortgage … they don't necessarily need to have homeowners’ coverage.
And if homeowners' coverage all of a sudden became really expensive, given that they're on fixed incomes, they might choose to go without. We don't have good data on that issue.
We know that underinsurance is a problem, and as homeowners become more fiscally constrained by just the raw cost of housing, it's likely to become more of a problem. I just think it would be sort of strange to think that it wouldn't come without some sort of minimum requirement.
And right now, what we have is a requirement to provide information … every couple of years, provide some information to the insured about whether they're under-insured or not. But it's not a requirement to actually make sure the policies are adequate.
