A wildfire burns the hillside behind a California home

California Aims to Stop Wildfire Homeowners Insurance Collapse

As Californians cope with the yearlong threat from wildfires, the state is still trying to figure out how to stop insurers from abandoning fire-prone areas.

Last year, the California Department of Insurance temporarily stopped insurers from canceling policies on homes in or near risky parts of the state. 

With that ban set to expire in December, experts expect insurers to continue a retreat after several years of megafires has cost insurers billions.

If homes in fire-prone areas become essentially uninsurable, the impact will likely devastate the housing market. Without insurance, banks will not issue mortgages, making homes significantly more challenging to buy or to sell.

“The marketplace has largely collapsed” in those high-risk areas, Graham Knaus told The New York Times. Knaus is executive director of the California State Association of Counties, which has pushed the state to address the problem. “It’s a very large geographic area of the state that is facing this.”

State regulators across the West face a dilemma, let rates rise and squeeze homeowners or risk that more insurers will continue to pull back.

In California, where regulations lean toward consumers, the challenges are more pronounced.

Insurers are permitted to set rates only based on prior losses, not expected future damages. 

Also, regulators do not allow insurers to include the cost of reinsurance in its rate-making calculations. Reinsurers provide insurance to better known primary carriers, such as Farmers and State Farm. Those costs have been increasing.

Data suggests that insurers have continued to drop customers. Between the start of 2019 and June 2020, households buying coverage from California’s FAIR Plan increased by 50%, according to reports. 

The FAIR Plan is considered insurance of last resort. It excludes standard coverages like liability and theft and caps policies at $3 million.

Even the costs of the FAIR Plan are increasing. The Plan asked the state permission to raise its rates by 15.6% after seeking an increase of more than double that amount.

Cal Fire statistics show that 2020 has been a record year for wildfires, with over 4 million acres burned. The total land scorched is approximate to the area of the entire city of Los Angeles burning 12 times.