The Palisades and Eaton wildfires in Los Angeles County have forced the evacuation of thousands of homeowners, many without adequate coverage because of the state’s broken home insurance system. And while new efforts are being implemented to keep affected homeowners insured and expand coverage, it may be too little, too late for many.
How California’s home insurance system failed residents
Obtaining homeowners insurance in California is notoriously difficult for those living in areas prone to wildfires. And this problem has only gotten worse in recent years.
The effects of climate change combined with poor forest management are accelerating the frequency of larger wildfires, according to multiple climate groups, the National Oceanic and Atmospheric Administration (NOAA), and the Environmental Protection Agency (EPA). Data from the California Department of Forestry and Fire Protection (CAL FIRE) shows that the number of wildfires in the state that require action has steadily increased over time.
As fires become more frequent, insurance companies are withdrawing coverage for homeowners in areas most at risk for wildfires. In 2022, Allstate announced it will stop issuing new business and personal property insurance in California.
Farmers Insurance Group announced it will begin sending non-renewals to California customers in 2023 and will stop accepting new applications. State Farm, California’s largest insurance company, has announced that it will no longer accept new applications for property and casualty insurance in 2023. And last year, the company refused to renew 72,000 home insurance policies, about 2% of the California insurer’s total policies.
“When faced with increased losses and payouts, insurance companies typically respond in two ways: by raising premiums, or by stopping policy renewals and new business. “California’s insurance companies are doing both,” Dave Jones, director of the Center for Law, Energy, and the Environment at the University of California, Berkeley School of Law, said in an interview in the university’s magazine on September 19.
As insurance companies retreat from this field, homeowners are increasingly turning to state Fair Access to Insurance Requirements (FAIR) plans, which provide basic fire insurance coverage, as a last resort for homeowners insurance. I’ve come to rely on it. It is a shared plan, meaning it is financially supported by a private insurance company rather than the government. FAIR plans are intended to be a temporary solution, but in recent years they have penetrated the insurance market more than previously intended.
According to state data, insurance policies issued through the FAIR plan increased by 20% from 2022 to 2023, then by 40% from 2023 to 2024. Los Angeles County accounts for nearly a quarter of the total FAIR planning portfolio, according to a Moody’s Analytics analysis. The ZIP code that includes Pacific Palisades, which was devastated by the Palisades Fire, is among the top five in the state for planning risk, according to Moody’s.
Multiple wind-driven fires in LA have caused significant property damage, meaning the FAIR Plan’s system is likely to be overloaded with claims from policyholders. And the number of claims is likely to increase as the two largest fires, the Palisades and Eaton fires, remain uncontained.
In September, California Insurance Commissioner Ricardo Lara announced details of a sustainable insurance strategy. This is a plan aimed at strengthening the financial stability of the FAIR program. But he also included some depressing details in his announcement: “California faces an increased risk of more intense wildfires due to climate change, and a major wildfire in a geographic region with a high concentration of FAIR Plan properties could deplete FAIR Plan reserves and production capacity. Pay consumer bills quickly and completely, which can be overwhelming. ”
This statement was made just months before the most devastating wildfire in Los Angeles history. Moody’s suggests the fire could be the costliest in U.S. history. A new JPMorgan analysis estimates that insured losses could exceed $20 billion and economic losses could reach nearly $50 billion.
Although the potential costs of fires are staggering, private insurers are likely to be able to meet their obligations to policyholders, according to a new report from S&P Global Ratings. The report says losses from recent wildfires “will rapidly deplete the catastrophe budgets of U.S. primary insurers,” but many private insurers do not have the funds to absorb those costs. He added that there is.
Meanwhile, the FAIR project reportedly does not have the funds to cover its losses. Sen. Alex Padilla (D-Calif.) told the New York Times on Tuesday that the FAIR plan only has $377 million available for claims. . If you run out of funds, your plan can convert to reinsurance. Reinsurance is essentially insurance for insurance companies.
But FAIR Plan Chairwoman Victoria Roach told a state legislative committee last year that the plan only has $2.5 billion in reinsurance. If that $2.5 billion isn’t enough to pay policyholders, and loss projections say it likely won’t be enough, private insurers will have to make up the funding gap. As a result, private insurance companies are likely to charge their customers more. The nonprofit Consumer Watchdog said all homeowners in California could pay an additional fee of $975 to $3,700 for missing a FAIR plan.
How states are stepping in to help homeowners affected by wildfires
To protect homeowners who are already vulnerable to the effects of fire, the State Insurance Commission recommends that homeowners living in fire-prone areas, including homeowners already affected by the Los Angeles County fires, The government has taken measures to give insurance companies a one-year grace period to remove insurance companies (including foreigners) from insurance coverage. The moratorium, announced Jan. 9, applies to anyone who owns property within the boundaries of the Palisades, Eaton and other nearby fires or in adjacent zip codes.
There is precedent for such a ban, with the state implementing a similar policy in 2019 for people whose homes were damaged by wildfires.
Commissioner Lara also called on insurance companies to cancel non-renewals issued in the 90 days before the state of emergency and to cancel pending non-renewals. This will cover thousands of Los Angeles homeowners whose insurance policies were canceled before the fire. Lara called on insurance companies to suspend all pending non-renewal policies for at least six months starting January 7 to assist homeowners in their recovery efforts.
One of the laws governing renewal is already in place. In the event of a complete loss of property due to a declared disaster, the insurance company must provide renewal coverage for at least two years, or for a period of 24 months following the loss.
Additionally, there is already a 60-day grace period for insurance premium payments for properties within the areas covered by the state of emergency declaration. According to a Jan. 9 press release, Lara called on insurers to extend this grace period “for as long as is reasonable under the circumstances.”
California homeowners affected by the wildfires who have policies or have recently had their policies terminated will lose their insurance after the Insurance Commission suspends cancellations and non-renewals. No more worries. Residents can check their ZIP code on the state insurance website to see if their ZIP code is covered by the moratorium.
What new reforms mean for Californians
While emergency measures and existing legislation aim to protect residents from additional costs during the relief and recovery period, the new legislation could do even more in the long term. By the end of this month, insurers must begin expanding coverage to include wildfire-prone areas.
This policy is an effort to bring insurance companies back to the states. Companies are allowed to use catastrophe modeling to determine interest rates and charge higher premiums in high-risk areas. Instead, insurance coverage should be expanded to cover at least 85% of the market share, including in wildfire-prone areas. However, the switch does not flip immediately. Insurance companies would be required to increase coverage for homeowners in wildfire-prone areas by 5% every two years, until the total coverage reaches 85%.
Coverage will steadily expand over the next few years, making homeowners in wildfire-affected areas more likely to purchase private insurance. You will also be more likely to continue your policy after the current suspension period ends. But as a result of the expansion, homeowners will also have to pay higher insurance premiums.
The tide is already starting to turn. In August, the state gave Allstate permission to begin raising interest rates by 34%. In exchange, the company agreed to suspend non-renewal plans. Then, on December 14, Farmers Insurance announced that it would begin offering insurance to new customers.
State Farm has not yet been approved for a request to increase property and casualty insurance rates up to 30%. But on Wednesday, the insurer announced it would offer renewals to policyholders affected by the Los Angeles wildfires, including those it had planned to eliminate.
Further progress is on the way. On December 30th, Lara announced the final stages of its sustainable insurance strategy. This includes expanding coverage. Set industry-wide reinsurance costs and price caps. And it would ensure price consistency by prohibiting “model shopping,” where insurers choose one model that generates higher premiums for consumers and another that lowers reinsurance costs.
What homeowners can do after experiencing fire damage
Insured homeowners must file a claim with the company before applying for financial assistance from FEMA. As of Jan. 14, State Farm said it had processed more than 6,700 home and auto insurance claims for affected policyholders.
California homeowners affected by the fires can apply for FEMA assistance online at DisasterAssistance.gov. Call the FEMA Helpline at 1-800-621-3362 or use the FEMA app.
Here we will explain in detail what to do with your mortgage in the event of a disaster.
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