‘Balanced on a knife edge’

California’s insurance market is in serious trouble, with this month’s wildfires threatening to worsen an already fragile situation. As The New York Times reported, experts are warning that the rising costs of these fires could cause more insurers to pull out of the state, making it harder for homeowners to get coverage.

What’s happening?

California’s insurance market has been struggling for years, with companies increasingly pulling out due to rising losses from larger, more frequent wildfires. The most recent fires are expected to worsen the situation, pushing even more insurers to leave, driving up costs and leaving fewer options for homeowners.

According to Nancy Watkins, an insurance expert at Milliman, “The California insurance market has been balanced on a knife edge,” and these fires could push it past its breaking point.

Many of the homes impacted by the recent fires are insured through California’s FAIR Plan, a state-backed program designed as a last resort for homeowners who can’t find coverage on the private market. These plans are more expensive and offer less coverage than traditional insurance, making them a challenging option for homeowners already facing the devastation of wildfires.

If the FAIR Plan runs out of funds because more homes enroll as a result of the fires, other insurers will be forced to pay up, further straining the market and pushing them to exit California.

Why is this so concerning?

California’s insurance crisis has been building for years. Major fires in 2017 and 2018 wiped out a quarter-century of profits for insurers, forcing many to cut back on their coverage.

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In response, California temporarily blocked insurers from dropping policies in areas affected by wildfires, but this has not solved the problem. The rate of nonrenewals — policies not renewed by insurers — has been rising since 2020, and many California counties now have some of the highest nonrenewal rates in the country.

If insurers keep leaving, it could cause even bigger issues. Without insurance, it’s nearly impossible to get a mortgage, and without a mortgage, most people can’t buy homes. This could lead to plummeting home prices, threatening the economic stability of communities already at risk of wildfires.

As climate change worsens, extreme weather events such as wildfires will only become more frequent, increasing risks for homeowners and the environment.

What’s being done about the insurance crisis in California?

California’s insurance commissioner, Ricardo Lara, has implemented new policies to try to stabilize the market, including allowing insurers to adjust premiums based on wildfire risk. Additionally, there’s talk of incentivizing homeowners to take steps to reduce fire risk, including upgrading their roofs or the defensible space around their homes.

As the fires continue, the true cost to California’s insurance market is still unclear, but one thing is certain: This crisis will only worsen as climate change keeps driving up wildfire risks.

Climate action at the global level is crucial to reduce the frequency and intensity of wildfires. Support for policies that address the root causes of climate change, including transitioning to clean energy and reducing emissions from dirty energy sources, could help mitigate the problem in the long run. On a local level, organizations such as the California Public Utilities Commission and the Natural Resources Defense Council are pushing for stronger climate policies to protect the state.

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