Natural Disasters

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.

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  1. Sooner or later, they will modify the proposal so that only rent controlled properties are covered – – – –

  2. since there is no safe place to live anywhere in California it makes sense that all Californians share in the pain. Or we can empty the state and with all the vacant homes left I’ll stay rent free.

    1. Ron:
      Well Ron in a strange way I sort of agree with that for two reasons.

      The first is that in California the people who do not live in the wildfire risk areas are legendary for their absolute refusal to allow any increase in density. Californians even have a name for this attitude:NIMBY. Not in my back yard. That’s why in much of those non-wildfire prone areas the only new housing construction approved in the last decade has been for the $700,000 and up market. This is part of what is driving all the development in wildfire prone areas. Since the NIMBY crowd had a hand in creating the problem they should split the costs.

      The second reason has to do with the evolution of the role of power utilities since the 1970’s. Back then California was able to meet it’s daily power demand with electricity generated in state(most of the time). But as time progressed, and for various different reasons, California electric utilities chose to not replace aging/polluting generation facilities and instead the increased reliance on power bought over the grid. The role of the utilities changed from being a producer of electricity to simply the delivering of electricity. To accomplish this the “grid” as it’s called, was dramatically increased adding miles and miles of high tension power lines. This increased the danger of fire from transmission lines. The responsibility for this lies with everyone in Cali. So it’s fair to say that the cost should be split across Cali.

  3. When I was 10m years old a forest ranger came to talk to our school in Altadena, right up against the San Gabriel mountains. Kennedy wasn’t sworn in yet. This was in the days before web pages and emails, so the ranger talked to us about fire risk to homes and handed out pamphlets about how to build a home in a high-risk fire area. That way, maybe the kids would bring the pamphlets home and the parents might read them.
    Don’t have shake roofs. Don’t have composition roofs. Use either metal or tiles.
    Don’t have wood sides unless covered with stucco, best with stucco with asbestos fibers (remember the year.)
    Install wire screens below roof eaves so that burning embers will not be caught under the roof.
    Keep a cleared area around the house.
    Those people who built in Paradise and other areas in the woods did so because of the high cost of land in California. Having little money, they ignored pretty much all the ranger’s recommendations. Cheap land, cheap housing. Subsidizing fire insurance will just lead to bigger disasters.

    1. Lots of the homes in Paradise were built prior to even Kennedy being sworn in long before they were worried about fires even though fires had wiped out several towns in California since its inseption. I just did the replacement plans for a house the lady built in 1942

    2. My home had just about every fire-safety measure one could imagine. True that a lot of those homes were lacking in such commonsense measures, but a whole bunch weren’t. In fact, MOST of the homes in my little neighborhood had been built in the last 15 years, and were very much “up-to-spec.” I spent ten grand on my acreage knocking down trees and clearing vegetation down to the ground. In this case, temperatures as high as 2300 degrees were recorded. There isn’t a home in the world that will stand that.

      The real problem in my area was lousy overall land management: and the feds, the State, as well as a lot of private folks share that blame.

      But, and I can’t say emphasize this enough, if PGE had cut power, like they warned me they were going to do via two emails the day before, this would not have happened.

  4. Just like if you live on the beach you are going to have a hurricane every few years, if you live in the forest, you are going to have a forest fire every once in a while.

    Beyond that, the people of California have only themselves to blame for this. If they would cut down the brush growing near their homes and neighborhoods and conduct controlled burns on what remains, these wildfires would never burn down their homes. But, they can’t do that. That would violate the cult of Gia. So, instead they do nothing and watch their homes burn down. They should just consider it a sacrifice to the climate Gods and call it a day.

    1. Brush is only a minor part considering that one year the fore Jumped hwy 80 between Truckee and Reno in an area that is almost a mile clear of trees.

      1. Fire not fore

      2. Fair point. So, you cut down the forest to create firebreaks.

  5. world’s smallest violin until they clear the brush.

  6. 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.

    Here is a place that California could prove that a single payer home insurance is the way to go. If it works for these high cost home owner insurance they then could extend to all property insurance. Then if it works in property insurance they could take it into health insurance with the state being the only insurer for both.

    1. Don’t forget single payer auto insurance.
      Single payer tattoo insurance.
      Single payer prime beef roasted tenderloin insurance.
      Single payer single malt scotch insurance.

    2. “If it works?” Excuse me! When you have the power to tax, anything can be made to work.

  7. “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.”

    Yes, I know I only had a 400 sq foot cabin. But the contents were very, very high quality and I spent at least 2 mil furnishing it. So just send me a check, okay?

  8. It should be noted that some of this “pretty tinder” was NOT tinder a few decades ago. It was NOT tinder when the property and homes were purchased.

    What turned them into tinder were federal and state forestry mismanagement. Tucille should know this. My mother has property in “pretty tinder” where beetle infestation killed off a lot of trees. But it’s illegal to cut down those dead trees. Against the law to make the property safe.

  9. “California Follows the Disastrous Flood Insurance Path to Fire Insurance Fiasco.

    Well, its California, so you know the stupid leaders in Sacramento will repeat their stupid policies, and then say they need more of the taxpayers’ money to remedy this “crisis.”
    Its a scam that’s worked in California (and a host of other states) for years.
    Why quit now?

  10. If we don’t subsidize those who want to build in fire prone area then how will they ever be able to build.

    Society needs to help those who cannot think for themselves.

    Oh, BTW, how about clearing some of the forest fuel that accumulated over the decades from the “cut nothing” policies of the state ramrodded through by environmental groups. Might it help?

  11. Simpler fix would be to eliminate all requirements for insurance. If you want it, buy it. Fix auto insurance while you are at it.

  12. “The refusal of insurance companies to cover homes in fire-prone areas is prompting home buyers to cancel purchases and look elsewhere.”

    Those companies are doing more for CA residents than the CA state gov’t ever hoped to do.

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