The destroyed entrance to a housing development on Jan. 8 in Altadena, Calif.EJ Soto/The Associated Press
As the fires in Southern California continue to burn, residents of neighbourhoods razed by the infernos have begun to grapple with their devastating new reality.
Some have lost friends and neighbours. Thousands have lost homes and the priceless memories inside them. And they aren’t the only ones undertaking the grim task of calculating losses that, overall, will be in the tens of billions of dollars – at least.
Insurance companies are doubtlessly shuddering at the prospect of what this disaster will mean for them.
If California was experiencing an insurance crisis before the recent fires, it is now confronting something almost existential in dimension. This catastrophe will make those big insurers that had slowly begun retreating from fire-prone areas of the state even more reluctant to offer coverage to residents living in a region where climate-change-related conflagrations now happen almost every year.
But then, many areas of the U.S. are now vulnerable to climate change-related weather events that cause billions in damage annually. According to the New York Times, since 2018, more than 1.9 million American home insurance contracts have not been renewed. In more than 200 counties, the non-renewal rate has tripled or more.
A wait-and-see approach won’t cut it for today’s intense wildfires
But the insurance problems in California, in particular, have been on the rise. The so-called Camp Fire near Chico in 2018 caused an estimated US$16.5-billion in damage, which in turn led to net losses for insurance companies. According to a recent piece in The New Yorker, the number of homeowners’ policies in the state that were not renewed the following year jumped by more than 30 per cent. Two years ago, the insurance behemoths State Farm and Allstate announced they had stopped writing new policies for several different types of properties in California. And just last summer they cancelled coverage for more than 1,500 homes in Pacific Palisades, which was levelled by the current fires.
Some of those left high and dry have turned to the state alternative, known as FAIR (Fair Access to Insurance Requirements). It is more expensive and does not offer the kind of extensive coverage the big insurers do. Late last year, the state also passed a regulation that forces insurance companies to offer protection in high-risk areas that amounts to 85 per cent of what their footprint is statewide.
So if a company wrote 10 per cent of the home policies in California in 2024, it has to offer packages up to 8.5 per cent of homeowners in high-risk areas. However, they can offset their potential liabilities by imposing significantly higher rates on those homeowners than what people in less exposed areas are paying for insurance.
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That said, these latest fires are undoubtedly going to prompt a rethink by both the state and private insurers. Even doubling or tripling rates for those living in high-danger zones won’t cover the losses insurance companies face in the event of fires like the one that has wiped out Pacific Palisades. Not even close.
Consumer Watchdog, a consumer advocacy group that focuses on the insurance market in California, told CNN that rates could go up 40 to 50 per cent as a result of changes imposed by government to insurance policies in the state. And this was before the current catastrophe.
The other factor affecting rates is inflation. It simply costs more to replace structures – the materials, the labour, the everything.
Sheldon Whitehouse, a Democratic senator from Rhode Island, told the Times that emerging insurance trends were as good an indicator as any “for predicting the likelihood and timing of a significant, systemic economic crash,” as non-renewals begin to affect property values.
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“The climate crisis … is not just about polar bears and it’s not just about green jobs. It actually is coming through your mail slot in the form of insurance cancellations, insurance nonrenewals and dramatic increases in insurance costs.”
Anyone who thinks this insurance crisis won’t soon migrate to Canada is kidding themselves.
The area consumed by summer wildfires in California has increased dramatically in the past few decades. A study by the group Climate Central found that rising temperatures have increased the number of “fire weather days” – defined as hot, windy and dry – throughout the state. The desert basin east of Los Angeles, for instance, now has an average of 61 more such days a year than it did five decades ago.
California has become the North American poster child for what climate change is doing to our lives. Once upon a time, like a good neighbour, insurance companies could be counted on to help those affected by disasters get back on their feet.
That is an assurance no longer guaranteed.