amna: The smoky air that shut
down so much outdoor activity in
the northeast last week was a
sobering reminder of the
widespread impacts of wildfires
and climate change.
There's been a different kind of
impact in California as well,
one that's also partially tied
to wildfires.
William brangham focuses on that
part of the story and what it
could mean for insurance in the
golden state.
William: For years, state farm
has been the largest provider of
homeowners insurance in
California.
But it recently announced it
will no longer sell new
homeowners policies in the
state.
It said the move was driven by
the high cost of construction,
and the growing risks from
catastrophes like wildfires.
State farm's move followed a
similar one by allstate
insurance, and other pullbacks
from insurers like chubb and
American international group,
who decided not to renew some
existing policies.
So what does this mean for
homeowners and other businesses
in a state with increasing risks
from wildfire and other extreme
climate driven events?
Michael wara is a lawyer and
senior fellow at the woods
institute for the environment at
Stanford university.
Thank you so much for being
here.
Can you tell us more about what
is driving this move by the
insurance companies?
They cited these two risks, the
increasing risk of fires burning
structures, and the increased
cost of building or rebuilding
those structures.
What else is there?
Michael: I think what is driving
a lot of this instability in the
insurance market has to do with
the rapidly changing risk of
wildfire interacting with a
regulatory system, which by
design, changes quite slowly.
In particular, and allows price
increases that occur very
slowly.
We have a lag, and the challenge
layered on top of that has been,
as everyone has experienced,
increasing inflation.
In California, particularly
increasing costs for
construction.
The insurers are stuck between
quickly increasing risk, and
slowly increasing allowed
insurance pricing.
Geoff: You mean if the insurers
were really treating this as the
cost of doing business, they
might increase rates more
rapidly than the state allows by
law?
William: That's right --
William: That's right.
Many insurers have slowly been
increasing rates since
catastrophic fires that occurred
in 2017 and 2018.
.
The napa, so -- sonoma fire, in
the campfire after that.
That reset insurers vision of
what kind of catastrophes were
really possible in the state of
California.
That increased risk needs to be
priced into rates eventually.
The California insurance
regulatory system allows for
very slow adjustment in prices.
It does not allow, currently,
for insurers to price in the
risk of climate change as it is
today.
The prices are set by looking
backwards at the risk as it has
been over the last two decades.
That means a slower pace of
adjustment.
That is leading to real problems
for the industry.
William: What does this mean for
homeowners and people who want
to buy or sell a house in
California?
This is not something you can
dispense with.
Michael: The last several years,
it has been getting harder and
harder to find the standard
insurance product, especially
for homes in high-risk areas in
California.
It has made it harder to buy and
sell homes.
People that have policies have
mostly been able to get them,
but a small set of existing
policy upholders have lost what
is called their admitted lines.
The standard homeowners
insurance product.
They had to go to the insurer of
the last resort.
It implies higher costs, and I
can also be more challenging
just in general to get coverage.
What has happened recently is
the larger insurers are deciding
they don't want to sell new
policies not just to people who
live in high-risk areas but to
anyone in California.
They are trying to reduce their
overall exposure to the state as
a whole.
.
That is a major change.
William: Major change indeed.
I have long heard
environmentalists and other
climate risk modelers say that
insurance can be a useful tool
for trying to get people to live
in safer areas and avoid risk
areas and good policymakers to
focus on the risk of climate
change.
Is that in part what is
happening here?
Michael: California has been a
leader in investing in wildfire
risk reduction.
And I think we deserve credit in
that the state policy makers
deserve a lot of credit.
But we still have much more to
do.
I don't think we are at the
point yet where anyone would ask
people to leave their homes
because of wildfire risk.
But the reality is that it is
getting more expensive to live
in riskier places in California.
The margin, that may induce some
people to leave those places.
It may make it less -- it may
make the home in those places
less valuable.
There are some developing
evidence that that is occurring
in California.
I think we are far from a place
where we would say walk away
from a community, and I think
there is a lot more to do to
reduce risk in and around
communities in California before
we would take that drastic step.
William: What do you see as the
trajectory going forward?
You were describing a regulatory
issue here that needs to be
addressed.
Do you think costs will keep
going up and it will become
tighter and tighter for
homeowners going forward?
Michael: I do think insurance
costs overall in California will
continue to increase.
We are still adjusting to the
emergence of this catastrophic
risk of wildfire in California.
In the insurance system is not
fully adjusted to that risk yet.
We should expect prices to
increase.
It is important for viewers to
understand that home insurance
costs in California are
relatively low by national
standards.
That is because of the tight
regulatory framework we have.
We are going to need to allow
prices to adjust gradually
upward in a way that does not
cause shocks for homeowners and
household budgets.
But that does reflect the
growing risks we face in the
state.
William: The woods institute for
the environment at Stanford
university, thank you for being
here.
Michael: Thank you for having me
on.
Appreciate the opportunity.
♪♪