A New Housing Crisis Is Brewing In Places Prone to Climate Disasters

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In January, an insurance company called the Hartford announced that it would no longer issue any new homeowners insurance policies in California. Three other insurance companies, USAA, All State, and State Farm have stopped writing or severely limited new homeowners

It burnt down eighteen thousand buildings, cost sixteen point five billion in damage, killed eighty five people, left.

A lot more missing.

It made it the most expensive, catastrophic and lethal fire in the state's history.

And insurance companies were on the hook for a lot of that damage.

Was really a big financial blow and made everyone say, oh, my goodness, our model might not be working.

This is Leslie Kaufman, a climate reporter for Bloomberg. Leslie and our colleague Nadia say that as private companies have pulled back, the state has stepped in to help people get the coverage they need through residual insurance plans sometimes called fare plans.

It's a bare bones option that's usually far more expensive than a traditional policy, but it covers what a private insurer won't, like a wildfire.

It's supposed to be a plan of last resort, but the number of people in these types of plans is growing.

These were never meant to be big plans. These were meant to be teeny plans that served a tiny part of the marketplace. The problem is climate change is really changing that dynamic. It's made the much more common, much more mainstream, which means the risks are much greater.

And with more people relying on this kind of insurance, questions are starting to emerge about whether these plans are prepared financially to handle a major catastrophe.

The number of policies have absolutely grown by staggering amounts. The current liability in California is two hundred and ninety billion. That's about six times what it was only five years ago.

Today. On the big take, why insurance has become so hard to get for some homeowners, and how skyrocketing enrollment and state created plans could create the conditions for a sweeping financial crisis. I'm Sarah Holder, and this is the big take from Bloomberg News. The campfire that tore through Paradise, California, in twenty eighteen was said to have been the costliest natural catastrophe of the year, with an estimated twelve point

The campfire wiped out double the profits of twenty five years, so not just twenty five years of profits, twice that amount. So they went to California and said, we have all this risk and you have people in risky places. We want to raise rates now, and California said, no, can do. California has a proposition on the books that limits the amount of money you can raise.

California right now has some of the most consumer friendly of regulations that keep rates low, and when an insurance company does want to raise their rates, they're subjected to approval from the Department.

Of Insurance NADIA says that while the regulations have saved consumers one hundred and fifty billion dollars on premiums over the last twenty five years, the insurance industry argues that the caps have hurt them. They say they've made it harder to adapt to the growing risk of catastrophes brought on by climate change.

They can only use historical data to set rates. They can't use forward looking climate data currently, which is something they've been advocating.

For for a long time.

So ultimately, they argue that the state's current rules don't allow them to increase premiums enough to reflect the risk that they keep taking on.

And so a bunch of private companies have just decided to stop writing new policies entirely for Californians and certain high risk wildfire zones.

There's currently about eleven million people who live in California's wildfire risk zones. These are areas that include Lla County, San Diego, the vineyards of Napa and Sonoma, this Sierra Nevada foothills. It's unclear exactly the total number of homes, but there are significant populations across the state.

All of this has made the state created insurance plan increasingly popular.

So people are pouring into these plans as private insurers pull out, they have nowhere else to go.

So now this plan of last resort is bearing the risk that private insurers refuse to cover, which has raised a question is there enough money to cover all these new policies if another campfire were to happen. The plan doesn't make its finances public, but a state report estimates it's holding roughly one hundred million dollars in reserves as of twenty twenty one.

That's less than one percent of the insured losses from the campfire.

And this problem is bigger than just California because state created insurance plans exist in lots of other states. In total, thirty six states have these kinds of residual plans that offer natural disaster coverage. They all need to reckon with the same existential challenge.

As states have assumed more and more risk, they're dodging a fundamental question, how can they cover claims in the wake of a huge and major catastrophe.

So this is the really tricky part. They do get premiums, but they are not forced like a private and sure to do the kind of stress testing to make sure that they have enough reserves and reinsurance to pay their all their claims. I think how they're going to pay should there really be a decimating event, a really big catastrophic event is too unclear in too many of the cases.

After the break, what homeowners and state policymakers are doing to prepare for the worst. Welcome back to the Big Take from Bloomberg News. I'm Sarah Holder. Before the break, we were talking about state created insurance plans and the question of whether they'll be able to cover a bunch of claims in the event of a major catastrophe. We asked Nadia to walk us through a scenario. There's a huge wildfire in an area of California where a lot

The Fair Plan has a certain number of reserves, and if they don't have enough money to cover all of the claims from that event in that area, then legally they would place an assessment on all of its members.

And all of its members are those private insures.

Yes, private insurers are the members of the state created plan, and some of these members are the very same companies that have said they no longer want to write new homeowners' policies in the state.

So those private insurers would still be on the hook for paying out those claims in areas that they'd said they didn't want to cover anymore. That's why they're pulling out right. If they have to participate in the fair Plan proportional to their market share, they're going to reduce their market share in that state. That's what makes sense to them, so that the risk they take on through the fair Plan becomes lower. But then it's like a it's like a horrendous cycle.

It's only creating more problems.

Wait, this is crazy, Yes, it is. This is why we wrote this story because it is.

It is a very a vicious cycle.

Vicious cycle.

Yes, the more that private insures retreat, the bigger the fair plan grows.

So that presents more risk to the.

Private insures that are attempting to.

Reduce their risk by retreating. But then more people are left without options.

So this is all happening at a really fast rate, and inevitably there will be another wildfire or natural disaster, and so if a catastrophic event triggers its massive assessment, it could force a lot of private insurers and bankruptcy. What would happen otherwise? Would the state step in and say no, in order for them to recoup some of those losses, We'll allow them to put a surcharge on all their policyholders. It's unclear. That's what we don't have

Yeah, I mean, how is the state going to account for this possibility?

Right now?

As the private insurance are retreating. Ricardo Lara, the California Insurance Commissioner, has put forth a plan that he's calling the largest insurance reform in the state since proposition. Want to throw his pass back in the eighties, which set those friendly consumer regulations right, So his plan would drastically change the way the rules currently work. It would allow insurance to raise rates more quickly and to allow for increases based on future climate risk data and reinsurance costs.

As for the state's fair plan, the California Department of Insurance set in a statement that it performs a triennial examination to quote evaluate the financial condition, assess corporate governance, identify current and prospective risks, and evaluate system controls and procedures used to mitigate those risks end quote. Of course, California's is not the only state mandated plan facing this risk.

This is becoming a theme with insurance companies, how they could become your partner in hardening and what does that look like. That means that if you're in a flood zone, you need to go up on stilts or make sure that your sumpump is powered so that it wouldn't go out during a flood. If you're in a fire zone, you have to have a five foot protection around your house with nothing combustible, and that includes plants and shrubs.

But strategies like hardening only go so far as the risks of major storms and fires increase, which raises a question is moving away from these disaster prone areas something people should be considering.

I think that a lot of people are not left with many options. Tons of people. Most people live in parts of the state that aren't necessarily exposed to wildfires, in the San Francisco Bay area or other parts of the coast, but Increasingly more people are being exposed to wildfire risk all over.

These are their communities.

Some people chose to live in these places because they can't afford the high cost of living in a city like Sanforce, Cisco or La, and some people have deep communal ties.

To these areas.

It's a really tricky problem because even though there are some places of California that some people say we shouldn't be building in anymore, you can't really tell people that they should leave the communities that they loved and have lived in for generations.

This is the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by Adrianna Tapia. It was edited by Caitlin Kenny and Emily Buzo. It was mixed by Ben O'Brien. It was fact checked by Alex Sugiura. Our senior producers are Naomi Shaven and Jilda Di Carly. We get editorial direction from Elizabeth Ponso. Nicole Beemsterbor is our executive producer. Sage Bauman is our head of podcasts. Thanks for listening. Please follow and review The Big Take wherever