California: Insurance Debate Flares as Climate Change Boosts Wildfire Risk

Two deadly wildfires that ravaged Northern California last fall caused an estimated $1 billion in damages, state insurance regulators said this week.

The announcement comes days after California Insurance Commissioner Dave Jones signed an order making it easier for Californians to qualify for the state's "plan of last resort."

The California Fair Access to Insurance Requirements Plan, known as the FAIR Plan, provides basic property coverage for consumers who are unable to find coverage in the private insurance market, which often includes homeowners living in high-risk fire areas.

"The changes to the FAIR Plan included in this order will improve consumer access and the coverages available under the FAIR Plan," Jones said in a statement.

But some analysts fear that opening up the state-sanctioned insurance program undercuts the private market's ability to address mounting climate threats that are fueling damaging wildfires. Moreover, they argue, it does nothing to discourage development in fire-prone areas.

Wildfire insurance is not a legal requirement for Californian homeowners, although some banks may require it in order to get a mortgage.  Homeowners who do wish to protect their property must first try to get coverage from traditional insurers.  In recent years, some underwriters have scaled back where they will insure homes.  In 2007, for example, Allstate Corp. stopped issuing new policies in California.

For the nearly 2 million households in California considered at high risk of fire, the next stop for trying to procure insurance is from surplus line insurers, who write specialty policies at premium prices.  Between 2010 and 2014, the Surplus Line Association of California reports the number of policies filed jumped 30 percent.

Increased wildfire risk isn't the only driver, but it's playing a role, experts said.

Writing plans 'no one else will'
The last stop for coverage is the FAIR Plan.  The program was created by the state Legislature in 1968 but is privately operated and not subsidized by taxpayers.

Considered a bare-bones plan, the new order steps up the level of coverage offered by the FAIR Plan to include optional coverage for the replacement of the contents of a building, as well as coverage for debris removal.  The order also removes the requirement that consumers prove they were rejected three times for standard insurance before applying for coverage.

"That's a huge deal," said Ian Adams, senior fellow and Western region director of the conservative R Street Institute.  "By making the coverage in the FAIR Plan better and by making it the case that you don't have to be denied by others, it's effectively making it very, very difficult for private insurance companies to compete."
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Climate-driven insurance risks
But some see changes to the FAIR Plan as a bandage trying to fix a bullet hole of a problem.

As risk increases, the traditional insurance market either increases its prices or pulls out, leaving consumers to pay more or join the FAIR Plan.

"We're seeing people having to increasingly rely on it because private insurance market is judging the risk to be too high.  That's not a good sign -- it's a wake-up call," said Rachel Cleetus, lead economist and climate policy manager with the climate and energy program at the Union of Concerned Scientists.

"This is not a problem that is going to go away because the underlying risk will get worse in a hotter, drier climate," she said.

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