Faced with the twin climate crises of historic wildfires and spiraling insurance costs, California on Wednesday laid out new rules to make insurance more affordable in fire-prone areas. But the changes could backfire, experts say — pushing insurers to stop offering insurance in those areas and further imperiling communities on the front lines of climate change.
The changes are the latest round in the struggle between California regulators and the insurance industry, which has experienced huge losses starting with the wildfires of 2017 and 2018. In response, insurers have begun refusing to write new coverage for homes in fire-prone areas and dropping existing customers, leaving private insurance hard to get in some places.
That battle has made California into a test case for the financial dangers of climate change, and the political fights that can result. Losing access to private insurance can be devastating, hurting home values and making the homes harder to sell. The state has a high-risk pool for people who can’t get regular insurance, but costs are higher and coverage is limited.
California has struggled to respond to the erosion of its insurance market. Last December, the state’s insurance commissioner, Ricardo Lara, for the first time banned insurers from dropping people in or near areas hit by fires in recent years. But that ban lasts only one year — it expires this coming December — and can’t be renewed. The state legislature, facing a further exodus of insurers, considered a proposal that would have allowed insurers to seek bigger rate increases in those areas, but that measure collapsed.
As costs grow from this year’s fires, which have burned more than 3.3 million acres and destroyed more than 4,200 structures, California now faces the prospect that insurers will pull back even more quickly.
Now, the state is trying a different approach. In a series of measures announced Wednesday, Mr. Lara said he will develop standards for how homeowners and communities can reduce their wildfire risk, and then direct insurers to cut premiums for homes that meet those standards.
The state says those changes will benefit both homeowners and insurance companies by making wildfires less damaging.
The new rules will also let individual homeowners find out how much wildfire risk their insurance company believes they face, and challenge that determination.
“Once these mitigation standards are implemented, we bring down the risk of these communities, which again brings down rates,” Mr. Lara said. “What we have now is clearly not working.”
Rex Frazier, president of the Personal Insurance Federation of California, which represents insurers, said that incorporating these steps into insurance premiums doesn’t make sense, at least not yet, because nobody can say how much they might actually reduce wildfire risk.
“The science is nowhere near where it needs to be to quantify the impact of various mitigation actions,” Mr. Frazier said.
Getting insurers to incorporate risk-reduction steps into their premiums raises another problem, according to Nancy P. Watkins, a senior actuary at the consulting firm Milliman and an expert on the effects of climate change on the insurance market: Many of California’s insurers are already losing money in fire-prone areas.
“How is the insurance industry going to justify to its shareholders or to its members that this is a good place to do business?” said Ms. Watkins, whose company works both with California insurance companies and with regulators. “What’s the upside?”
The rules announced Wednesday sidestep the underlying problem, according to Michael Wara, director of the climate and energy policy program at Stanford University: The danger from wildfires keeps going up, and there’s only so much that individual homeowners can do on their own to reduce it.
“The risks are much, much greater than they were 10 or five or three years ago,” Mr. Wara said. “As a result of that, insurance costs for some homes are going to increase. We need to have a conversation as a state about what to do about that.”