The Los Angeles Times – As climate change challenges home insurers, an ‘uninsurable future’ looms


As climate change challenges home insurers, an ‘uninsurable future’ looms

To kick off the spiffy new version of this newsletter, I want to talk about your insurance policy.

Earlier this year two major insurers, Allstate and State Farm, announced they would stop offering new policies for properties in the Golden State. Officials from State Farm — the state’s longtime top home insurer — cited “rapidly growing catastrophe exposure and a challenging reinsurance market.”

Farmers recently announced it was laying off 11% of its workforce and tempering its growth goals in California.

The companies indicate they’re responding to what scientists have been telling us: Human-caused climate change is intensifying wildfires and other environmental disasters. Covering homes in increasingly dry, fuel-rich forests, on cliffs that don’t stay put and at the edge of the coast as sea levels rise is a business that’s only getting riskier.

“This could be the beginning of a market collapse that would leave millions stranded without affordable insurance as their homes burned to the ground,” Times business reporter Sam Dean wrote this summer.

These anxieties in the insurance market have been a long time coming, and enrollment in the state-sponsored FAIR plan, which covers properties other insurers refuse to, has more than doubled since 2018.

But critics have also questioned whether there’s more to the companies’ decision to step back from states where the effects of climate change are becoming more apparent.

Are they using climate change as “an excuse to escape from … regulatory protections,” as Consumer Watchdog founder Harvey Rosenfield told Bloomberg?

I spoke with Dave Jones, director of UC Berkeley’s Climate Risk Initiative and the state’s former insurance commissioner, to learn more about these high-profile retreats and what they could mean for Californians. He acknowledged the debates about insurers’ motives and whether any “near-term policy changes [could] make some difference at the margin,” but cautioned that focusing on that part of the story could make us “lose sight of the forest for the trees.”

“The forest is climate change,” he told me.

Jones and other experts who consider environmental risks argue that this should be a wake-up call for government leaders. He noted Florida as an example, where insurers enjoy many perks that they don’t have in California, but are still leaving the state.

“Insurance isn’t magic,” Jones said. “Insurers are rational economic actors … in business to make money. And in some parts of the United States for some risks, they’re deciding that there simply isn’t a price high enough for them to make sense insuring that particular risk in that particular geography.”

Jones warned that the path toward an “uninsurable future” we’re currently on could eventually affect the housing market, though it’s not inevitable. If insurance premiums continue to climb and more people can’t afford them and their mortgages, they could default and lose their homes.

“I’m not suggesting that we’re there yet,” he noted, “but it definitely bears paying attention to, because that’s a potential path of transmission of this risk in ways that could have negative consequences for our financial system.”

So what else should the state and federal government be doing to avoid the “uninsurable future” Jones warns about? He shared a few ideas:

  • The Federal Reserve and other federal financial regulators need to get serious about assessing the risks climate change poses to the financial system. That’s something the Fed just recently started to do, though critics say their efforts are weak and well behind other countries’ efforts.
  • State and federal leaders should invest more in forest management, especially prescribed burns. Jones said officials finally recognized that “a century and a half of fire suppression has resulted in forests choked with fuel.” Prescribed burns are key to reducing the risks of fires growing to out-of-control infernos, and Jones would like to see insurers factor such risk reduction into their assessments.
  • Most significant, Jones said, is the need to dramatically and quickly cut the human-made emissions that affect our environment.

“This is only going to get worse if we don’t stop using fossil fuels and reduce greenhouse gas emissions,” he said. “There has been some important progress made by California … but we and every other state need to do more.”

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