Californians are protecting themselves from wildfire. Why is there still an insurance crisis?
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Spend any time thinking or talking about insurance in California these days and you’re bound to hear the word “mitigation.”
Fire officials, lawmakers, insurance agents and others are asking homeowners to help lower the risk of devastating wildfires by making improvements to their properties — in some cases at great expense — and often in the context of trying to hang on to their insurance policies. The state has spent about $3.7 billion on forest management in the past seven years. Communities, fire districts and others are doing their part, too.
But some insurance companies citing growing risks and costs have paused or stopped writing new policies in California, causing a crisis of home-insurance affordability and availability. Some homeowners have seen their premiums spike or are being priced out, while others have been forced to turn to the ever-growing FAIR Plan, the insurer of last resort that offers less coverage but higher insurance premiums anyway.
As Insurance Commissioner Ricardo Lara rolls out his plan to try to reverse that trend, three state lawmakers are pushing for mitigation to be taken into account when insurers set premiums or when they decide whether to offer policies at all. Or they want mitigation to be more effectively tracked and strategized.
“We believe that if you do the homework, you should get the credit,” said state Sen. Josh Becker, the Democrat representing Menlo Park. “As a state, we’re doing that homework.”
Becker’s staff cites the billions of dollars the state has spent on reducing fuel and managing vegetation since 2017, when wildfires consumed many parts of California. The sum doesn’t include other spending on fire engines, air tankers and increasing staff for Cal Fire, which has added about 4,500 positions in the past decade.
A bill authored by Becker seeks to incorporate mitigation into insurance companies’ underwriting decisions — when they consider whether to write or renew policies. Senate Bill 1060 awaits a hearing in the Senate Appropriations Committee.
One of the regulations Lara has unveiled as part of his plan to try to fix the state’s insurance market involves allowing insurers to use catastrophe models in rate-making, which includes taking mitigation into account. But some say that’s not enough to address the availability of insurance.
Former state Insurance Commissioner Dave Jones recently told CalMatters that Becker’s bill is needed specifically for underwriting because the insurance commissioner’s authority is limited to rate-making.
“Local, state and federal governments are spending billions of dollars in forest treatments, so homeowners ought to see a benefit,” Jones said. “That’s not happening now, but should happen.”
Wildfire mitigation and risk
Studies show that mitigation is reducing wildfire risks. A recent study by the National Association of Insurance Commissioners found that structural modifications can reduce wildfire risk by 40%, and, when combined with vegetation modifications, can reduce risk by 75%. A subsequent Moody’s study found that utility Southern California Edison’s actions to harden its power grid reduced the risk of catastrophic wildfire losses by 75% to 80%.
But insurance-industry experts have concerns about Becker’s bill. For one thing, they say incorporating mitigation into underwriting shifts more financial risk to insurers.
In addition, they say they already use models that account for mitigation.
Sheri Lee Scott, an actuary for a Milliman Property & Casualty practice in Orange County, said the bill is yet another regulation that could “exacerbate” the insurance crisis.
“Insurance companies are trying their best to incorporate (mitigation) already,” Scott said, pointing to a recent state regulation directing insurers to incorporate mitigation into determining premiums — which Scott wrote in a report “presents tremendous challenges for insurers in terms of compliance and the potential erosion of adequate rates for wildfire risk.”
The insurance commissioner said his office started enforcing that rule on considering mitigation last year, but homeowners, insurance agents, fire chiefs and other lawmakers say the different ways everyone is trying to reduce wildfire risk isn’t making enough of a dent in the state’s insurance crisis.
Bernard Molloy, fire chief of Murrieta, said during a public workshop hosted by the Insurance Department last week that “residents don’t receive credit” for the “tremendous amount of work” they put into trying to reduce wildfire risk. Jorge Escobar, a Bay Area resident, said during the same workshop that he had just asked the Moraga fire district whether insurance companies are taking mitigation into account. “The answer was, surprisingly, no… Why isn’t this being mandated?” he asked.
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