Why Home Insurance and Climate Change Will Cost All Californians

As another legislative session draws to a close in Sacramento, the problem lawmakers have failed to address is one of the most pressing facing Californians: the slow collapse of the property insurance market as the costs of climate disasters rise.

It’s not even a yellow flag issue. This is a red flag issue,” Gov. Gavin Newsom said Tuesday night when asked about the Legislature’s failure to act.

This year, several companies, including the state’s largest home insurer, State Farm, announced they were no longer accepting new residential and commercial properties, citing the risk of wildfires. In fact, seven of the 12 insurance groups operating in California – together representing about 85% of the market – have pulled out.

But behind-the-scenes discussions among elected officials to find a fair and workable path to get insurance companies to write more policies — or in some cases none at all — have gone nowhere. Instead, lawmakers are vehemently pledging to hold public hearings this fall on the diminished prospects of Californians seeking coverage for their homes and, by extension, their chances of getting and keeping their mortgage during a crisis housing situation which is getting worse.

If only insurance were as cheap as speech.

It is sadly clear that the speed and ferocity of climate disasters have intensified. In just eight months in 2023, the United States has recorded 23 climate-related disasters, each causing at least $1 billion in damage, according to the National Oceanic and Atmospheric Administration. This breaks the previous record of 22 such disasters in all of 2020.

It is increasingly uncertain who will pay for all this damage and, as much as possible, rebuild all these disrupted lives.

Should Californians living in the most dangerous places, whether facing wildfires, flooding, or sea level rise, bear more of the cost of their risks? And does it matter that many of these communities are low-income, populated by residents who sought these homes precisely because they were excluded from cities that refused to build more affordable housing?

Or should the risk be shared among all of us, regardless of where we live? Higher insurance premiums across the board to stabilize an industry we all need.

Or should insurance companies be forced to somehow continue to bear the burden of climate disasters?

Rumor has it that a legislative solution was delayed largely because no one could agree on an answer. Even a compromise would not be politically popular, which is perhaps why this part of the debate has remained largely behind closed doors.

But as Newsom pointed out, growing pressure on the insurance industry is “America’s future attraction in terms of climate impacts.”

This is true for California, with its eroding coastline, mudslides, and fire-prone mountains; for Florida, Louisiana and Texas with hurricanes; for places like Kentucky and Vermont where extreme weather conditions led to devastating flooding.

Even for renters and car owners, the cost of insurance is increasing and will continue to increase as temperatures change.

“People can’t afford much, even middle class or upper middle class people. Across the United States, in different geographies, we are reaching a point where climate change is leading to an uninsurable future,” said Dave Jones, former California insurance commissioner and current director of UC’s Climate Risk Initiative Berkeley. “The risk is too high, at almost any price. »

Let’s be clear: of course, insurance companies want to maximize their profits. Of course, some of their claims about climate risk are aimed at raising rates. And yes, other factors, including construction inflation, are part of the equation.

Climate change should not be a free pass to abuse consumers: Despite all these disaster claims, insurance companies are still making money, even if their profit margins may not be as important as in the past.

But insurance is the surest bet against personal calamity, weather-induced or otherwise, so we need insurers to stay in the market. Which means we need to recognize that climate change has changed the calculus for protecting the places where we live and work.

“How can we work together to solve this problem in a way that everyone feels like they share a lot of the burden?” » asked Assembly Member Reggie Jones-Sawyer, who is a member of the Assembly Insurance Committee but has not been directly involved in the negotiations in recent weeks.

Jones-Sawyer said he was deeply concerned about passing the financial burden of climate disasters onto consumers, specifically citing residents in his South Los Angeles district. In California, with its entrenched poverty and income inequality, many simply cannot afford it.

“On the Assembly side, it was very important that we didn’t oversell our voters,” he said. “If your home insurance went from $2,000 a year, which is relatively low, but went up to $6,000 a year, in one year, who’s monitoring that? When you get to this number, it becomes a little too much. »

In the short term, solving this growing insurance crisis will likely fall to California Insurance Commissioner Ricardo Lara – perhaps through an executive order from Newsom, although the governor does not have the authority to regulate insurance.

Lara, of course, does, but her power is not unlimited. So what we’re likely to see in the coming weeks is a three-pronged plan intended to tackle the immediate problem while leaving the larger, deeper questions for later.

First, Lara will likely work to strengthen the state’s FAIR plan, the insurance of last resort for many — including Newsom, who owns a home covered by that plan.

Second, the way we assess risk will likely shift from models that look at past disasters to models that project into the future, taking into account risks from climate change.

And third, Lara will likely seek to streamline the process of raising rates — which, in California, can be difficult to do with regulations designed to protect consumers from obscene price hikes.

But it’s not just about insurance. It’s just that insurance is the first system to collapse.

“You can have debates about these different proposals, but what underlies all of this is climate change, and it’s only going to get worse,” Jones said.

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One way or another, all taxpayers will be forced to pay more for the worsening effects of climate change.

Even if Lara requires insurance companies to report on forest thinning and other landscape mitigation projects that reduce disaster risk – which he should – someone will have to pay for these projects. That “someone” will be the taxpayers.

And in California’s many high-risk places, where mitigation measures likely won’t make much difference, it will be taxpayers who will have to rebuild these communities after an increasingly inevitable disaster.

There are already signs that we will pay more at the federal level.

Consider that last month, FEMA Administrator Deanne Criswell took the alarming step of warning that the agency was running out of money after a year of unrelenting disasters.

The roughly $3.4 billion remaining in its Disaster Relief Fund, primarily used to reimburse communities for long-term recovery efforts, will be gone this month. In response, President Biden asked Congress for an additional $16 billion.

“All Americans rightly expect FEMA to show up when needed to help in times of disaster,” Biden told reporters during a tour of Hurricane Idalia damage in Florida . “I call on the U.S. Congress, Democrats and Republicans, to ensure funding is available to address immediate crises, as well as our long-term commitments to the safety and security of the American people.”

This is not the first time FEMA has found itself in this predicament and it likely won’t be the last, forcing taxpayers to continually bail out the agency, so that the agency can continually bail out communities destroyed by disasters caused by climate change.

Now imagine what would happen if the insurance market collapsed as well. This possible eventuality was the subject of a recent hearing of the US Senate Committee on Banking, Housing and Urban Affairs.

“Without insurance, millions of families will be more exposed to the risks of the climate crisis,” said Senator Elizabeth Warren (D-Mass.), a member of the committee, during the hearing. “And as entire communities lose access to insurance, the impact will be felt throughout our economy. »

This would be the greatest disaster and a place where California would not need to be a leader on climate issues.