As wildfires burn homes, thousands in California are without insurance

Thousands of people in California have lost their hearths and homes in one of the most destructive climate-related wildfires in the state’s history.

But what has compounded their misery is a lack of insurance cover at a time of natural disaster.

“...This is my parents’ home and they just lost (it)...they got cancelled from their fire insurance. They are dealing with this, they are 90 years old,” a visibly distraught Lynne Levin-Guzman, a California resident, told a local CNN affiliate.

“They’ve lived in this house for 75 years and they’ve had the same insurance… and these insurance people decided to cancel their fire (insurance),” she said.

In 2023, many large insurance companies scaled back operations in the third-largest US state because of price caps on how much they were allowed to charge homeowners in premiums.

Strong winds early this week spread fires in different parts of California, causing infrastructure damage in a state with high real estate prices and a declining number of homeowners’ insurance providers.

The catastrophe struck California at a time when its insurance providers were already under pressure.

California tightly regulates the maximum amount private insurance providers can charge homeowners — a policy that appears to have suppressed insurance prices for years.

“As a result, the insurance industry is limiting and withdrawing coverage in high-risk wildfire areas due to state regulatory policies, increasing risk from climate change,” according to a recent report by First Street Foundation, a non-profit environmental research organisation.

Studies show the climate crisis is resulting in a spike in the number of natural disasters as well as their severity.

In particular, the climate crisis is increasing the risk of wildfires and also the proportion of storms that reach the status of a major hurricane.

Insurance companies must pay out to policyholders every time a disaster hits California. But the law prevented them from recouping their losses the next year by raising prices.

As a result, the insurance industry says, its profits have gone down sharply. As many as 15 of the 20 most destructive wildfires in state history have taken place in the last 10 years alone.

Therefore, the easy way out for insurers is to exit markets like California that are at a high risk of climate-related disasters.

In 2023, seven of the 12 largest insurance companies by market share in California either paused or restricted issuing new policies in the state.

Their exit around the same time made it “extremely difficult” for homeowners in high-risk areas to obtain or afford insurance.

Insurer of last resort

A new regulation adopted by California seems to have come too late.

Earlier this month, the state allowed insurers consider climate change when setting their prices – a policy reversal aimed at preventing insurers from fleeing the state over fears of massive losses from wildfires.

Earlier, California did not allow insurance companies to consider current or future risks when pricing their homeowners’ insurance policy.

They could take into account only what previously happened on a property before setting the price.

This is why the most at-risk wildfire areas in California saw a nearly 800 percent increase in non-renewal of policies initiated by insurance providers, driving homeowners to rely on the state’s “insurer of last resort.”

Californians who can’t get regular home insurance either go without insurance or join the Fair Access to Insurance Requirements (FAIR) Plan, a state-created insurance provider of last resort.

In many cases, people buy the FAIR Plan only to obtain a mortgage that requires valid insurance.

However, the FAIR Plan covers only basic property damage. Its policies can be “very bare bones”, with some options only covering the actual cash value of what was lost rather than the true replacement costs, said Amy Bach, executive director of the consumer advocacy group United Policyholders.

In other words, homeowners who bought a FAIR Plan insurance policy and subsequently lost their homes in the ongoing wildfires may never be fully compensated.

The road ahead

California is implementing a new rule that will let insurers pass on the added costs of reinsurance to their policyholders.

Reinsurance refers to insurance for insurance companies. It means insurance providers limit their risks by buying insurance for themselves to survive any huge payouts owing to natural disasters.

As of now, California is the only state in the US that does not allow insurance firms to pass on the additional cost of reinsurance to their policyholders.

Opponents of the rule say that it could increase insurance costs by 40 percent. Consumer Watchdog’s Court says the rule could make it easier for insurers to raise rates with little oversight.

But California Insurance Commissioner Ricardo Lara insists the new rule allowing climate crisis consideration will help insurers accurately assess risks and set fair rates.

California is also issuing a one-year moratorium to stop insurance companies from dropping coverage in areas affected by fires.

In fact, all insurance companies must sell at least 85 percent of their statewide policies in “wildfire distressed areas” under the new policy.

This is expected to significantly increase insurance coverage in wildfire-prone regions in California, as no such requirement currently exists for insurance providers.