As wildfires of record magnitude swept through Northern California last week, destroying thousands of homes and other structures, the Legislature closed its 2020 session without doing something about the fire insurance crisis that afflicts fire-prone areas.
It ranks near the top of a long list of legislative failures this year, right up there with housing shortages and police reforms.
Insurers have sustained massive losses, tens of billions of dollars, from wildfires in recent years and are increasingly reluctant to continue coverage in fire-prone communities, even threatening to quit the market if they cannot increase premiums enough to cover projected future liabilities. Often, homeowners can only buy coverage through the state’s FAIR plan, which is bare-bones and expensive.
The ultimate solution would be to stop building and rebuilding homes in the “wildland-urban interface” — essentially the outer suburbs of major metropolitan areas – where the risk of catastrophic losses is highest. However, for the foreseeable future, much of California’s population will continue to live in those communities, such as Sonoma and Napa counties, the Sierra foothills and the mountain ranges ringing Los Angeles.
We need a new approach. A truly comprehensive solution would be layers of coverage, beginning with a basic statewide policy financed by mandatory fees on all residential property, adjusted by region. The statewide policy would be backed by reinsurance from the global market and, by covering the first layer of fire losses, would make private insurers more willing to offer additional layers.
The national flood insurance program more or less takes that approach. Homeowners in designated flood-prone areas must buy it, but it has limits, so they can purchase supplemental insurance to fill the gap between coverage and loss.
The insurance industry itself took a stab at a solution this year with legislation, Assembly Bill 2167, allowing insurers to include the cost of reinsurance in their rates, as well as allowing them to base premiums on calculations of future losses — two aspects banned by current law.
The shorthand for what insurers proposed is a “market assistance plan” that would make insuring homes in fire-prone areas less risky.
However, AB 2167 drew fierce opposition from consumer groups, saying it undermined Proposition 103, the 1988 law that imposed direct regulation on premiums by an elected insurance commissioner. And the current commissioner, Ricardo Lara, joined the opposition.
“In an era where climate change is contributing to more severe and frequent wildfires, homeowners need more protection — not less,” Lara wrote in an op-ed article. “COVID-19 might be the Legislature’s primary focus, but we cannot let the insurance industry use it to gut important consumer protections that have existed for decades.”
Last December, after several years of wildfires, Lara barred insurers from refusing to renew policies in ZIP codes where fires were common, but that order expires in a few months and cannot be renewed.
Although rural counties endorsed AB 2167, the opposition prevailed. In its last incarnation, the bill merely ordered a study by Lara’s Department of Insurance — the time-dishonored way politicians duck tough issues. But even that version died without a vote when the legislative session ended.
Obviously, the crisis will not solve itself. Insurers are facing many more billions of dollars in losses from this summer’s fires — and the traditional autumn fire season hasn’t even begun. When Lara’s order expires, we probably will see insurers refuse to renew policies in the wildland-urban interface or even pull out of California altogether.
The status quo may be unsustainable, but the men and women in the Legislature can’t be bothered to change it.
CALmatters is a public interest journalism venture committed to explaining how California's state Capitol works and why it matters.
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