Wildfire ripped through parts of this small city in hilly wine country last year, engulfing about 3,000 homes. That didn’t stop Jeff Lecoeuche from shopping for a house here.
“Maybe I’m stupid,” he said of living near a big burn. “As an insurance agent, I should say ‘Let’s not go there,’ but my wife likes it.”
Lecoeuche is a canary in the coal mine of climate adaptation. He’s an insurance broker who primarily sells Farmers Insurance, but he couldn’t find coverage from that company for the house he wanted to buy on the city’s outskirts. It’s located about 15 miles from the site of the Tubbs Fire, which roared through neighborhoods in the early hours of Oct. 9, 2017.
Other insurers, like Lloyd’s of London, were charging about 20 percent more than he’s currently paying.
Home insurance is one of the first places that average people feel the pinch of climate change. Wildfires in urban areas are causing new levels of destruction. In the past year, six burns entered the list of California’s 20 most damaging fires.
The rising damage isn’t entirely attributable to climate change, which has been found to be exacerbating fires in the western United States through drier vegetation, according to a studypublished in Proceedings of the National Academy of Sciences. People are also moving into dry, wooded areas, increasing the amount of property that gets damaged in fires, research published in the journal Land Use Policy found.
Insurers are in a position to amplify—or dampen—the economic signal that property owners receive. So far, the signals are mixed.
While insurance rates are going up, homeowners aren’t necessarily heeding the message that risks are on the rise.
“People who are rebuilding today in Fountain Grove tell me, ‘Oh, it burned, so we’re good for 50 years,’” Lecoeuche said. “I say, ‘No, actually it’s going to burn again in five years, that’s my thought.’ Because how long does it take for brush to grow? One season. All you need is a rainy winter and you could have brush everywhere. It could burn anytime again.”
Home and farm insurers in California lost nearly $16 billion last year, quadruple their losses in 2016, according to insurance credit rating agency A.M. Best. Wildfires account for most of those losses. About 15,000 homes were destroyed last fall.
It could take years for those losses to show up in premiums paid by homeowners, partly because insurers average their costs over a 20-year period. Also, California requires insurers to get state approval to change rates, a process that can take more than a year.
Still, property owners are seeing a “slow creep” in which insurers refuse to renew policies, according to an industry representative. Premiums are also on the rise, resembling insurers’ response to a major earthquake in 1994.
“We are seeing anecdotal evidence of targeted adverse underwriting actions in high-fire areas,” said Rex Frazier, president of the Personal Insurance Federation of California. “We’re not seeing wholesale departure, but it’s reminiscent of the slow creep that we saw after Northridge.”
A secondary cause of rising insurance costs is homeowners deciding to increase their coverage in response to the perceived risk. Lawmakers are also passing bills with the aim of strengthening policies. Gov. Jerry Brown (D) signed A.B. 1797 in August, requiring insurers to update homeowners more frequently on the estimated costs of rebuilding, so they can avoid being underinsured.
“Once the stories started coming out of, ‘Oh, so-and-so’s house burned down and they don’t have enough insurance for the cost of labor,’ ... everybody’s been kind of pumping up their insurance, and now we’re starting to see it,” said Sonoma County mortgage broker Glenn Groves, who evacuated his Santa Rosa house in last year’s fires and has 16 clients who lost their homes. “It wasn’t that the insurance became more expensive, it’s that they became more insuranced because they were scared of what happened.”
Individual companies are reluctant to provide detailed plans, but AAA Southern California said it plans to drop some fire-prone homeowners. It amounts to “less than 1 percent” of the company’s current enrollment in the region, a spokesman said.
“We want to continue offering home insurance at competitive rates for the long-term, and to responsibly achieve that long-term goal, we must periodically take steps to mitigate our exposure to catastrophic risk,” said Jeff Spring, the company spokesman, in a statement. “In California, that means mitigating our exposure to wildfires.”
FAIR or foul?
Insurers don’t have to disclose to state regulators how many policies they won’t renew, but homeowners are providing a snapshot in the form of complaints. A January report by the California Department of Insurance found complaints to the state about nonrenewals and premium increases roughly tripled in high-risk areas from 2010-16.
State officials estimate that dropped policies, known as nonrenewals, increased 15 percent between 2015 and 2016. Regulators also found that some annual premiums increased as much as fivefold, even when homeowners cleared brush around their houses to meet state defensible-space guidelines.
State regulators are concerned about availability, but they’re not sounding the alarm yet.
“It may be a challenge in some areas. If you’re in a super-high-risk area, it may be difficult,” said Nancy Kincaid, a spokeswoman for the state Department of Insurance. “It doesn’t mean that the market isn’t still competitive or that you can’t find good insurance; you can and you should, and you should shop around.
“Yes, California has things to be concerned about with climate change and the high risks that we have,” she added. “But California is still the largest insurance market in the nation; it’s the sixth-largest insurance market in the world.”
Homeowners who can’t find insurance can access the Fair Access to Insurance Requirements (FAIR) Plan, a bare-bones, industry-run option that the state created in the 1960s as a response to an availability crisis. The plan is required to accept all applicants.
“To the extent that we saw FAIR Plan policy counts go up dramatically, we would know that means people can’t find traditional private insurance or surplus lines insurance,” state Insurance Commissioner Dave Jones said at a news conference last month on wildfire damages. So far, there are only about 33,000 homes in the wildland-urban interface that have been driven to the FAIR Plan, he said.
“That’s bad news for those 33,000, don’t get me wrong, but there’s 8 million other homes that have been insured in one way or the other,” Jones said. “So getting worse, but not a crisis yet.”
According to a recent state filing, the proportion of fire-prone properties in the FAIR Plan’s portfolio has been steadily increasing. While overall enrollment in the plan is slightly declining—it fell 3 percent from 2012 to 2017, to about 124,000 properties—the drop has been in property classes with no wildfire risk.
Homes with a low wildfire risk have increased their enrollment by 30 percent over the same period, those with moderate risk have increased by 81 percent, and the riskiest properties have gone up by 38 percent.
“[I]t appears likely that the wildfire rates are inadequate at this time,” the plan said in its April filing. It proposed changing the balance of premiums between fire and regular coverage so that even though wildfire rates are slated to go up 25 percent, property owners will actually see an overall rate decrease of 6.8 percent, thanks to reductions in non-wildfire rates.
The FAIR Plan is also trying to get the state to allow it to use different data sets to determine adequate rate levels.
“Exposure has significantly shifted towards wildfire exposed areas,” the plan said in its filing. “Using historical data limits, less frequent wildfire events in the historical data, and ignoring the shift in exposure towards wildfire, would significantly underestimate the exposure and ignore larger events that have a low probability that are not represented in the historical period.”
The rest of the industry would like to change the way it calculates rates as well.
“Right now, the rates are set looking backward two decades,” said Michael Wara, director of the climate and energy program at Stanford University’s Woods Institute for the Environment. “In the insurers’ view, it tends to underprice the risk. Because things are getting worse.”
How much worse is an open question. Of the state’s 13.6 million housing units, 3.6 million are in the wildland-urban interface, and about 1 million of those have been graded at a high or very high risk of wildfire by insurers, according to the state.
While the situation evokes comparisons to the massive damage caused by the 1994 Northridge earthquake, enrollment in the FAIR Plan accounts for just 1 percent of the state’s home insurance market.
After the 1994 Northridge earthquake near Los Angeles, insurers balked at the state’s insistence that they offer affordable policies. Regulators ended up creating a state-run earthquake program that enrolls only about 10 to 20 percent of homeowners, due to high premiums and deductibles.
“That was a moment in time when everyone was worried,” said Janet Ruiz, California representative for the Insurance Information Institute, an industry group. “On the fire side, we’re not even close to that.”
Farmers Insurance Group is planning to introduce a new policy in the coming months that combines FAIR Plan coverage for fire risk and private coverage for other damages. While Farmers is based in California, others are less wedded to the country’s largest insurance market.
“A lot of companies are saying, ‘We have too much risk in California,’” Lecoeuche said. “So the more companies move out, the more it’s an issue for the remaining companies because they have too much risk left, so that’s why the state may have to do something.”
Jones, who is finishing up his final term as insurance commissioner, has made climate change a signature focus. He’s asked insurers to disclose their exposure to climate-related financial risks and to stop investing in companies that own thermal coal assets. He released a report last month that said insurers that ignore climate risks are committing “professional malpractice.”
On property insurance, he has been pushing lawmakers to expand the state’s authority by requiring insurers to disclose the models they use to assign risk, offer a credit for property owners who take steps to mitigate risk, and create a supplemental “difference in conditions” policy to fill in gaps in coverage, among other recommendations.
“Sadly, none of those proposals have been taken up by the Legislature,” Jones said last month. “I anticipate that the next commissioner will continue to engage on these issues because the problem is growing and the nature of the risk is growing.”
State Sen. Ricardo Lara (D), who is running to replace Jones, passed two climate- and insurance-related bills this year: S.B. 30, which will examine the potential to insure wetlands, forests and other climate buffers against damage, and S.B. 824, which protects residents against post-wildfire policy cancellations and requires insurers to disclose their residential fire risk exposure starting in 2020.
The other candidate, Steve Poizner (I), who previously served as insurance commissioner from 2007-11 as a Republican, did not respond to requests for comment.
“There’s no doubt that protecting homeowners and protecting people from these extreme fires has to be a top priority for the next insurance commissioner,” Lara said in an interview. “Right now, the Department of Insurance is operating with very limited information. By the time they get word of communities being dropped, it’s too late to bring in the insurance industry, bring in some of the players and say, ’What are the justifications for you leaving this market?’”
Back in Sonoma County, Lecoeuche decided against buying the house he liked in Santa Rosa. It wasn’t solely due to increased fire risk. Another peril played a role. The house lies directly on the Rodgers Creek Fault, which the U.S. Geological Survey estimates is among the most likely to produce the Bay Area’s next major earthquake.
“If it was only the fire risk, it would still be OK to buy that house,” he said. “Because I would basically have the defensive measures: cutting the brush, get a big water tank, put a sprinkler system on the roof and under the eaves.... That may not have sufficed, but then you just get insurance.”
Add risks from mudslides and earthquakes, and Lecoeuche said, “It’s like God is saying, ‘Here’s a hint; here’s another hint.’”
Reprinted from Climatewire with permission from E&E News. E&E provides daily coverage of essential energy and environmental news at www.eenews.net.