California’s Wildfire Insurance Catastrophe

Everything the Democrats touch goes up in flames.

California’s Wildfire Insurance Catastrophe

The state has refused to let insurers do proper pricing for risk. Homeowners and taxpayers will pay for the mistake.

By: Wall Street Journal Editorial Board, January 10, 2025:

The politicians are blaming each other for the losses in the horrific Los Angeles wildfires, but the truth is that mother nature can be merciless. The stories about water shortages are conflicting and need more time to sort out. But it’s not too soon to note that California’s politicians have fueled a five-alarm insurance-market crisis that will hurt homeowners and taxpayers across the state once the fires have died out.

Hurricane-force wind gusts are fanning fires across Los Angeles County, especially the Pacific Palisades and Altadena, where 2,000 structures had burned by Thursday evening, and counting. At least five people have died, and tens of thousands of buildings are at risk. California’s Southland has rarely experienced such strong winds, and the past two wet winters have produced loads of combustible vegetation that has became tinder after recent dry months.

Such conditions have created a perfect storm that could become the most expensive wildfire disaster in U.S. history. The human tragedy is paramount. But the insurance losses will be in the tens of billions of dollars or more. The damage could topple the state’s undercapitalized insurer of last resort, FAIR. Private carriers are almost certain to increase premiums, cancel policies or withdraw from California.

Insurers had already scrapped hundreds of thousands of policies and limited coverage in wildfire-prone areas. Democrats blame climate change, which has become an all-purpose excuse for any disaster-relief failure. But the real insurance problem is that state regulators have barred insurers from charging premiums that fully reflect risks and costs.

California is the only state that heretofore hasn’t allowed insurers to incorporate the cost of reinsurance in premiums. Until this year, it had also prohibited insurers from adjusting premiums by using the standard industry practice of catastrophe modeling to predict a property’s future risk. Insurers could only assess premiums based on historical losses.

As a result, insurers are paying out $1.09 in expenses and claims for every $1 they collect in premiums. This is financially unsustainable, which is why many have pared coverage in areas at high fire risk with expensive homes. State Farm dropped nearly 70% of policy holders in one Pacific Palisades neighborhood where the average home price is $3.5 million.

FAIR now covers about half a million homeowners who can’t obtain private coverage. Its exposure has ballooned to $458 billion as of last September from $153 billion four years earlier, with $5.9 billion in exposure in the Palisades. Yet it has only about $700 million cash on hand to pay claims.

That’s because state regulators have required FAIR to cover higher-priced homes while rejecting its proposals for rate increases to account for rising risk and liabilities, just as it has for private insurers. As home prices and construction costs increase, so do liabilities. Building an “affordable” housing unit in California can cost $1 million.

FAIR President Victoria Roach testified to the state Assembly last year about the insurer’s precarious finances. “As those numbers climb, our financial stability becomes more in question,” she said. “We are one event away from a large assessment. There’s no other way to say it, because we don’t have the money on hand, and we have a lot of exposure out there.”
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