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California's wildfire risk is so high and costly, some insurers are leaving the state

AILSA CHANG, HOST:

In August 2020, in the midst of a punishing heat wave, lightning struck California almost 12,000 times, igniting fires all across the state.

(SOUNDBITE ARCHIVED RECORDING)

GAVIN NEWSOM: And so 23 major fires...

CHANG: Governor Gavin Newsom said he had called in the National Guard.

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NEWSOM: We declared a statewide emergency yesterday.

CHANG: Thousands of firefighters had already fanned out throughout the state.

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UNIDENTIFIED REPORTER #1: Cal Fire has now ordered a mandatory evacuation for the entire town of Felton.

UNIDENTIFIED REPORTER #2: We have seen a steady stream of cars, everyone pulling their jet skis, lawn equipment, RVs.

CHANG: In the mountains outside Santa Cruz, bystanders described apocalyptic scenes as flames engulfed small communities.

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UNIDENTIFIED PERSON #1: It was like a movie. We were watching the fire just roar in, and you could hear propane tanks blowing up.

UNIDENTIFIED PERSON #2: We have bridges that have failed - old, wooden bridges that have failed.

UNIDENTIFIED REPORTER #3: Check out the back of this car, the glass totally melted away - and over here, this house left in rubble.

CHANG: That fire, the CZU Lightning Complex fire, was one of California's most destructive on record, killing one person and razing about 1,500 homes and buildings to the ground. It's the type of disaster that the state's largest home insurer, State Farm, might have been referring to when it said recently that it's facing, quote, "rapidly growing catastrophe exposure in California." And as a result, State Farm would stop selling new homeowners' policies in the state. The state's fourth largest insurer, Allstate, had already done the same. And those decisions aren't surprising to some residents in the state's fire-prone areas.

DREW: We've been evacuated three or four times since 2016.

CHANG: Drew owns a home in the Santa Cruz Mountains and had to evacuate during those 2020 fires. The flames actually spared his house, but he learned last month that his home faced another threat - his insurance company said they were dropping coverage.

DREW: They basically told us that we were dropped because of the risk of wildfires. And when we went to go reinsure, no other insurers are apparently insuring this zip code anymore.

CHANG: Now, we're only using Drew's first name because he's afraid that speaking out may make it harder for him to get insurance in the future. He says his family couldn't find any company to write a policy, so they turned to the state for help.

DREW: We had to go with the Fair Plan, which is like the California State fire plan, which is significantly more costly and doesn't cover as much. It just becomes financially not the best decision to stay in this location.

CHANG: They decided they're going to sell their home, meaning they literally have to relocate in order to get affordable homeowner's insurance, which was a shame because Drew loved living in the woods.

DREW: There's a lot of uncertainty in terms of what we can sell the house for and how much the uninsurability (ph) of the zip code will factor into what people are willing to bid for it.

CHANG: Drew is not alone. In the last five years, a growing number of Californians have been unable to renew their policies, and more of them are buying that state-sponsored insurance of last resort. Michael Wara at the Stanford Woods Institute for the Environment says a lot of insurance companies simply can't afford the growing risk in California.

MICHAEL WARA: In two years, 2017 and 2018, the insurance industry in California lost the equivalent of the two decades of profits they had made prior to those years. We haven't had a repeat of either of those years since. We've had some good luck in our fire seasons. But I think everyone is very concerned that luck could run out really at any time, and the insurers are trying to price their risk accordingly but running into problems doing that because of the regulatory system we have.

CHANG: OK. Well, I want to talk about how people are trying to allocate the blame right now. Is it only this issue of climate change? - because insurers often say that they can't charge enough to cover the risk that they are taking on, specifically because of California's insurance regulations. Can you just, like, very briefly explain what those specific regulations are and why they pose a specific challenge to insurers right now?

WARA: It's a very complicated situation, but I think to boil it down, I'd say two things. The first is that insurance pricing in California works by looking backwards. It says, how much have you lost in the last two decades? That should determine your risk. And that isn't fit to purpose when the risks are changing and increasing quickly. The second issue is that insurers manage what they call catastrophic risk by buying reinsurance, and that's basically insurance for insurance companies.

CHANG: OK.

WARA: And in California, unlike in - so far as I know - any other U.S. state, reinsurance costs cannot be passed through to the insurance buyer in California. So the insurance company just has to eat that expense. And that was fine when catastrophe risk was relatively low in California. But it's less and less adequate as the risk has grown of these kind of large-scale losses of houses during catastrophic wildfire.

CHANG: So do you think these recent moves by insurers like Allstate and State Farm are just negotiating tactics to get California to come to the table and revise these regulations you're talking about?

WARA: I think that's one way to look at it. You know, this is a complicated regulatory negotiation that's playing out. And the regulator in California needs to make sure to get a good deal for Californians. But insurance availability is the most important climate adaptation strategy that most Americans can take part in. We need to make sure that insurance is available. Otherwise, when disaster strikes, people's most valuable assets will be lost.

CHANG: Well, what if California doesn't come to the table and doesn't try to change these insurance regulations? What do you think will happen?

WARA: What's happening right now is State Farm is saying we don't want to grow in California anymore. But insurance policies are one-year policies, and I think the real risk is that if the state doesn't act to improve the environment for insurers in California, that major insurers like State Farm could decide not to renew all of their policies. And something that is very routine for most homeowners could become very not routine and very challenging for existing homeowners with existing mortgages and a budget that they've allocated for paying their housing costs. And I think that is something we very much need to avoid.

CHANG: So what needs to change, in your mind, in order to prevent more insurance companies from fleeing the state?

WARA: I think we need to strike a new balance between how much homeowners pay for the benefits that insurance provides, given the effects of climate change in California.

CHANG: Well, California, you know, it already has a high cost of living. So if, for whatever reason, home insurance prices do increase, won't that just exacerbate the existing affordability problem?

WARA: There's no question that it will. You know, the home insurance costs are a relatively small part of total housing costs in California. And actually, Californians pay a relatively low amount for their homeowner's coverage relative to other states.

CHANG: Oh.

WARA: But of course, California has faced some of the highest housing costs in the country. The state has been making enormous efforts to build more housing over the last few years, and what we don't want to see happen is insurance issues interfere with that effort. So we need to make sure that new homes can get new insurance policies. And if those policies cost a little bit more, I think it's a price worth paying.

CHANG: Michael Wara is the director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment. Thank you very much.

WARA: My pleasure, Ailsa.

(SOUNDBITE OF SADE SONG, "SOLDIER OF LOVE") Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Tyler Bartlam
Christopher Intagliata is an editor at All Things Considered, where he writes news and edits interviews with politicians, musicians, restaurant owners, scientists and many of the other voices heard on the air.
Ailsa Chang is an award-winning journalist who hosts All Things Considered along with Ari Shapiro, Audie Cornish, and Mary Louise Kelly. She landed in public radio after practicing law for a few years.