Forest fires threaten California communities on a new financial front

Years of destructive forest fires have left millions of Californians at risk of losing their home insurance, highlighting fears that climate change will soon make parts of the country uninhabitable for financial reasons.

This could have devastating effects on communities across the state.

“In California, insurers say ‘Sorry, we no longer insure your area,” said Carmen Balber, executive director of Consumer Watchdog, a California-based advocacy group.

To prevent insurers from letting policies expire through non-renewal, California passed a bill in 2018 prohibiting insurance companies from dropping consumers in policy fire zones for one year after the fires. forest. The law protected about 2.4 million policyholders last year, according to the California Department of Insurance.

The move was prompted by the tens of thousands of non-renewals that followed the devastating fire season of 2018. According to a 2020 report According to the California Department of Insurance, non-renewals were up 31% statewide in 2019 from the previous year.

The numbers were particularly acute in postal codes with a “moderate to very high” fire risk, at 61%, and 203 percent in the 10 most at-risk counties.

But critics say the state’s moratorium on dropping insurance policies is just a stopgap – “like trying to stop a tsunami with a fence,” said Yevgeny Shrago, policy adviser from the left-wing group Public Citizen based in Washington, DC

If entire cities and regions start to lose their insurance, Shrago said, economic “death zones” could emerge long before climate change renders an area uninhabitable.

Most mortgages require property owners to have insurance. This means that banks could decide that homeowners are in default if an insurance company excludes a property from fire coverage.

From there, the effects could spread to local businesses and communities at large, Shrago said. If a home in a fire-prone area does not qualify for fire insurance, a bank may not offer a mortgage to a potential seller, effectively trapping homeowners and removing resources to adjust.

The increased fire risk, especially since a lack of insurance undermines mortgage lending, could in turn drive up the cost of loans – often taken out against potentially uninsurable physical infrastructure – and cut or significantly increase the cost of loans. credit price.

“Now it’s harder for my community to get credit,” Shrago said, “and people are less likely to open a business. So property values ​​start to drop.

In California, where home sales are a primary source of income for local governments, that means significantly less money for the types of climate adaptation and resilience cities would need to manage their climate change risks.

Difficulties in accessing capital or insurance are more likely to affect low-income communities and communities of color, which already suffer disproportionately from a lack of investment.

For now, California homeowners who have lost their coverage as a result of a fire or through no fault of their own can access coverage under the Fair Access to Insurance Requirements (FAIR) program.

On July 20, a California Superior Court judge ruled that the state insurance commissioner can order FAIR to offer comprehensive plans with property and casualty insurance – as opposed to expensive supplemental plans – allowing the program to serve as a one-stop-shop for people cut off from fire insurance, according to the Associated Press.

But that only alleviates the problem, said Balber of Consumer Watchdog, who noted that FAIR plans can be “hundreds of times more expensive” than conventional policies.

FAIR is available in California, Oregon, and Washington. Other western states threatened by wildfires – Arizona, Colorado, Idaho, Montana and Utah – do not have such programs.

For Balber, this highlights a bigger problem: the state of California, and the West as a whole, delegates to insurance companies the question of where people should live.

“Insurance companies ask, ‘Are people building places that are going to burn, and should we leave them more?’ “She said.” We say, ‘This is a good policy question – for national and local lawmakers.’ This is not a question we should leave to a private, for-profit insurance company.

And benchmark prices could go up without really explaining why to customers. The California State Weather Insurance Task Force released a draft report in June recommending that the State study whether California insurers are allowed to increase rates on the basis of proprietary “catastrophic modeling”.

But these models are “a black box,” Balber said, leaving buyers with little information on why their prices have increased.

In June, Balber accused the insurance industry to use the crisis to slide into deregulation long fought against by the California Insurance Commission – and to hide the role the insurance industry is playing in deepening the climate crisis by ensuring the very development of fossil fuels that contributes to make fires worse.

The insurance industry’s focus on individual policies is also ill-suited to the emerging crisis, said George Bradner, chief of the P&C division of Connecticut, one of six state regulators struggling to set policies. insurance standards in the age of climate change.

“There is a great photo of Galveston after one of the hurricanes,” Bradner said, referring to the coastal city of Texas. “A homeowner built his house to a higher building code. It saved her home – leaving her alone in a row of devastated properties.

“So what’s the value of this house?” The whole area is totally depreciated. You need a sense of community when it comes to resilience and catastrophic loss, ”he said.

The insurance industry needs to “step up” and encourage these community efforts against fires and storms, Bradner said. “There’s no point in a homeowner toning down or building their home to a higher standard if all the other homeowners don’t. If three houses burn around them, the probability of damage to their house is higher.

Community flood policies offer a possible model, Bradner said, where “the city collects the premium and pays for flood insurance,” providing it to underserved areas. “Then these residents recover faster and regain their standard of living – instead of being pushed out of their place of residence. “

Bradner called on the federal government to “reward states and communities for being proactive on mitigation,” and said a “paradigm shift” was needed in which insurance companies were doing the same.

But so far, Consumer Watchdog’s Balber said, there has been little consistent action. Less than 20 percent of the insurance market “offers people discounts to harden their homes against fire,” she said.

“Homeowners are spending tens of thousands of dollars installing a replacement fire roof, replacing sprinklers, clearing trees – and they don’t see a dime in savings,” she said.

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