California has banned home insurers from dropping policies in areas vulnerable to the effects of wildfire risk. The new policy places a one-year moratorium preventing insurers from dropping customers in or alongside ZIP codes struck by recent wildfires.
The moratorium covers some 800,000 homes around the state. The state has also asked insurers to voluntarily stop dropping customers anywhere in California because of fire risk for one year. California’s insurance commissioner says the hold on non-renewals due to wildfire risk will give the state’s insurance market a chance to stabilize while the state looks for solutions to the wildfire problem.
Homeowners insurers lost an estimated $20 billion due to California wildfires during 2017 and 2018.
One consequence of global warming is that it intensifies natural disasters such as fires and floods, but insurers have struggled to anticipate the spiraling costs. Natural disasters in 2017 and 2018 generated $219 billion in payouts worldwide, according to Swiss Re, a leading insurance company.
At the same time, though, government regulators are struggling with their own conundrum: They must balance the need to protect consumers from high insurance rates with the need to keep insurance companies from going out of business entirely.
Insurers’ Liability
The insurers’ struggle is all the more remarkable considering that they are explicitly in the business of putting an accurate price on risk.
“There’s just the shock of companies waking up to the liability that’s on their books,” said Rex Frazier, president of the Personal Insurance Federation of California, which represents the state’s insurers. “There are a lot of people scrambling to really understand the nature of this catastrophic risk.”
In a survey of 27 state insurance regulators this year, the consulting firm Deloitte found that just four states said their insurers were “fully” or “largely” prepared to respond to the risks of climate change. The danger of insurers being overwhelmed by worsening natural disasters “is very real,” Deloitte wrote in its report.
The outcome of that struggle matters far beyond the effects on people who buy insurance, or the investors who stand to lose if insurers fail. Insurance is vital to the ability of communities to rebuild after wildfires, storms and other catastrophes, experts say, particularly as government funding for assistance becomes increasingly strained.“Is our business model going to keep working in the face of this kind of change?” said Carolyn Kousky, executive director of the Wharton Risk Center at the University of Pennsylvania, characterizing the concerns sweeping the insurance industry. “If our insurers are in trouble, that jeopardizes people’s recovery.”
The California Challenge
California has become a case study of how an industry that is central to dealing with climate change has instead been hobbled by it — and how regulators, in their efforts to protect consumers, could risk making the problem worse.
After two years of extreme losses, it is clear that California’s insurers are struggling to prepare themselves for a new era of accelerating climate risk, according to interviews with insurance executives, academics and regulators. New research shows that the wildfires of 2017 and 2018 alone wiped out a full quarter-century of the industry’s profits. Last year’s Camp Fire was the costliest disaster anywhere in the world that year, according to the insurer Munich Re.

Construction in late October to replace houses destroyed in the 2017 Tubbs fire. Photo: NY Times