California Follows the Disastrous Flood Insurance Path to Fire Insurance Fiasco

If market-rate wildfire insurance is too expensive for homeowners, maybe that's telling us something about the risks of living amidst pretty tinder.

There's a crisis threatening to scorch state homeowners, Californians say. Residents in forested areas threatened by wildfires are running into problems finding affordable insurance as insurers adjust premium prices—or refuse coverage—to reflect the risk and expense of settling amidst pretty tinder. But, as you might expect, politicians propose to "fix" the problem. Their scheme follows the path set by government-funded coastal flood insurance, spreading costs to taxpayers who live far from danger areas to effectively subsidize development in high-risk areas for the lucky few.

"California's wildfires have found yet another way of doing serious harm to rural California—by hammering its housing market," the Sacramento Bee reported last week. "The refusal of insurance companies to cover homes in fire-prone areas is prompting home buyers to cancel purchases and look elsewhere."

Insurance companies aren't completely exiting the market. In many cases, they're dramatically hiking premiums to reflect the costs they've run into after two truly disastrous wildfire seasons.

"Insured losses from the most destructive wildfire month in California's history climbed $614 million in the first three months of the year, pushing total claims over $12 billion as of April," the California Department of Insurance announced earlier this year. That came after the department's acknowledgment of the previous year's $12 billion in losses.

But California regulators don't just report costs—they increase them, too. In 2018, the California Department of Insurance leaned on insurers to "provide up to 100 percent of contents (personal property) coverage limits for fire survivors who experienced a total loss and relieve them from the requirement of providing a detailed home inventory."

No doubt, homeowners much appreciated that gesture. But it certainly left room open for fraud—and generated higher costs that played a role in companies' decisions to hike premiums and withdraw from high-risk markets.

For homeowners struggling to find wildfire insurance—which is generally required before you can land a mortgage—state insurance companies have grouped together to provide last-resort coverage under the FAIR Plan. But FAIR coverage is expensive and intentionally bare-bones. California politicians think they can do better—at least in terms of pleasing the folks who vote them into office.

Their plan is to make taxpayers pay some of the insurance costs of homeowners who want to live in areas prone to fire.

"At the end of the day if we need to look at government subsidies that's a conversation we need to have, and must be had," Insurance Commissioner Ricardo Lara said.

Such subsidies would make wildfire insurance more affordable. With insurance within reach, Californians could continue to build and settle at relatively low cost to themselves in areas that insurance companies consider high-risk for devastating and expensive fires.

That's exactly the wrong move, if you think people should pay for their own risky decisions.

"Nearly half of all new homes are built in the wildfire-prone wildland-urban interface," the R Street Institute's Ray Lehmann wrote in May in the Insurance Journal. "To the extent that insurers are showing themselves less eager to extend coverage to properties in the wildland-urban interface, those are market signals we should heed, not try to override."

It's not like we haven't seen where ignoring market signals and subsidizing risky choices takes us. We've already been down this path with flood insurance. When Americans insisted on building and living in flood-prone areas and private insurers hiked the cost of premiums beyond the price that most people were willing to pay, Congress implemented National Flood Insurance in 1968.

Under the program, "some 30,000 buildings classified as 'severe repetitive loss properties' have been covered despite having been swamped an average of five times each," Steve Chapman pointed out last year. "Homes in this category make up about one percent of the buildings covered by the flood insurance program—but 30 percent of the claims."

Some years ago, John Stossel described purchasing beachfront property on Long Island in 1980, with the insurance costs made affordable by federal subsidies. "The insurance premiums were a bargain. The most I ever paid was a few hundred dollars. Federal actuaries say if the insurance were realistically priced, it would cost thousands of dollars," Stossel wrote. "The cheap insurance encouraged more people to build on the beach, so the insurance risk is now huge. Today, $645 billion in property is guaranteed by Uncle Sam."

Ultimately, federal insurance paid to rebuild his beach, and even paid out when a storm washed the house away. He benefited from the policy, but at the expense of taxpayers who lived in safer places.

"What a dumb policy," Stossel added.

Unsurprisingly, when you subsidize the cost of doing something risky, you get more risky activity. And the costs then grow, and grow, and grow…

"[The National Flood Insurance Program] has had to borrow from the Department of the Treasury to pay claims from major natural disasters," notes the Government Accountability Office. "As of September 2018, FEMA's debt stood at $20.5 billion despite Congress having canceled $16 billion in debt in October 2017. Without reforms, the financial condition of NFIP could continue to worsen."

Such reforms could include shifting the burden of risk in the form of market rates for insurance to the people who want to live in flood-prone waterfront communities. If they're willing to accept the cost, good for them. If the costs are too high, they'll move elsewhere.

But so many people—many of them registered voters, you can be sure—are covered by subsidized flood insurance that reforming the system and ending subsidies for their hazardous choices will be an uphill battle.

California isn't quite there yet—it's just playing with the idea of making the same mistakes with wildfire insurance that the feds made with flood insurance. If California follows through, there's little doubt that people will be happy to purchase insurance at prices that reflect only a fraction of the actual risk of living in a fire-prone area.

Then Californians will be able to look forward to long years of dangerous development encouraged by "a dumb policy" that requires repeated debt bailouts and calls for reform.

Or, California could just go ahead with the reforms early and let wildfire insurance premiums reflect the risk the policies cover. That won't thrill everybody, and it may not buy a lot of votes, but it's the responsible approach when people are—literally—playing with fire.