Will Insurance Cover the Fire Next Time?

Mortgage lending, municipal bond ratings, home insurance: It’s been clear to climate researchers for years that one of these interrelated financial instruments would eventually start to buckle under the weight of growing climate risks.

For a time, it looked like bond ratings might be the first chip to fall, says Thomas Ruppert, the assistant provost for coastal resilience at the College of William & Mary in Virginia. Nearly a decade ago, ratings agencies were warning coastal cities to invest in climate resilience or see their credit ratings downgraded. But it’s become clear in the last couple of years that the insurance industry is scrambling to get out of places that are especially prone to extreme weather. Last year, insurers State Farm and Allstate both announced they were pulling back on writing new policies in California, partly because of growing wildfire risks. The growing likelihood of massive property destruction, on the scale seen in the Los Angeles wildfires of the last few weeks, exposes insurance companies to bigger losses and makes it harder for them to turn a profit.

“If there’s increasing risk, there is increasing cost,” Ruppert says. “The question is, who pays that cost?”

Insurers began raising rates and dropping coverage around California after the devastating wildfire seasons of 2017 and 2018, says Carolyn Kousky, associate vice president for economics and policy at the Environmental Defense Fund. Those years saw the most destructive fires in the state’s history, including the 2018 Camp Fire, which killed 85 people and destroyed the town of Paradise, Calif. It remains to be seen what records will be set by the fires still smoldering in Los Angeles, but there’s little precedent for the scale of property destruction that’s occurred in some of the dense neighborhoods affected by the fires. For insurers, “I think it’s going to make them continue to question the profitability of operating” in wildfire-prone areas, says Kousky. But the implications — for homeowners, tenants, communities and policymakers — go far beyond the insurance industry.

“The stark reality we have to face is that we have not decarbonized at the scale we need. So we are locked into growing risk,” Kousky says.

Policymakers have labored to keep residents insured. At the urging of the insurance industry, California has recently made a series of changes allowing companies to set premium prices using factors like reinsurance costs and catastrophe models. That has allowed companies to raise premiums.

“The question now is, are those regulatory changes enough, given the growing risk?” Kousky says. “What we’re really going to see now is how much the challenges were regulatory in nature and how much the risk was simply too high.”

One thing insurance companies haven’t done consistently is factor property-level mitigation measures into premium costs. In response to fire or flood risk, property owners have sometimes invested in improvements that lower the chance of damage, only to see their premiums still raised or their coverage dropped altogether. Officials are urging companies to account for those efforts when setting premiums and offering coverage.

Still, “a lot of the kinds of risks that we’re talking about when we talk about big disasters are ones that individuals haven’t caused and can’t mitigate on their own,” says Moira Birss, a senior fellow with the progressive Climate and Community Institute.

In the wake of the L.A. fires, both California Gov. Gavin Newsom and L.A. Mayor Karen Bass have said they plan to waive certain permitting requirements to help communities rebuild homes and businesses more quickly. It’s understandable for elected officials to want to help communities restore normalcy as quickly as possible, Birss says. But to some degree it’s “short-sighted” to promote rebuilding in these communities without substantially rethinking how and where structures are built.

“It could potentially put those same people or their kids or others in danger,” Birss says.

Some states, including California, have created public insurance programs offering some level of coverage for people who can’t get private insurance. But those programs tend to have inherent weaknesses. They’re akin to health insurance programs that only cover people with the most serious illnesses, Birss says. In a disaster like the one unfolding in Los Angeles, those programs can quickly become overwhelmed.

Still, recent polls suggest people support the development of public insurance programs to manage disaster risk, and are more likely to trust state and local governments than private companies to determine climate risks. The Climate and Community Institute has proposed the creation of state-level “Housing Resilience Agencies” to provide public disaster insurance and coordinate resilience efforts.

State governments have a role in pressuring insurance companies to account for property-level risk mitigation, says Dave Jones, director of the Climate Risk Initiative at the University of California Berkeley and a former California insurance commissioner. (They should also pressure insurance companies to divest from fossil fuels, which are contributing to global warming, Jones says.) But the crisis in insurance coverage is only a reflection of the bigger threats to people’s property and livelihoods posed by climate change, experts say.

“The most important thing is rethinking what our communities look like in the face of rising climate risk,” says Kousky. “We can’t financially engineer our way out of this. We have to actually lower the risk.”