Smolens: Climate change and California’s looming insurance crisis

California is so concerned over the future cost and availability of insurance it's calling in the United Nations for help.

Recent reports detail how homeowner insurance policies in regions prone to wildfire are being canceled or becoming significantly more expensive.

Developments planned for high-risk fire zones are not only being challenged politically and legally over whether they diminish the quality of life for people living nearby but also over public safety and climate change concerns.

Eventually, homeowners in certain coastal areas are certain to have a similar, if more slow-moving, experience as sea-level rise increases flooding and erosion, making their dwellings a riskier bet for insurers. Some residents on unstable bluffs have for years faced insurance issues, in addition to the challenge of pursuing public or private efforts to shore up the cliffs.

Tens of thousands of beachfront homes across California face the risk of chronic flooding or worse, according to projections. It may be 50 to 100 years before it gets that bad, but property values are likely to be affected along with insurance.

This will extend beyond homeowners to businesses and, to varying degrees, governments.

At the root of the insurance challenge is climate change, which many experts say is exacerbating wildfires and flooding and making storms more destructive. Insurance companies, like governments, are increasingly stressed trying to grapple with that.

In July, California Insurance Commissioner Ricardo Lara said his agency will be working with insurers and officials of the U.N. Principles for Sustainable Insurance Initiative on a yearlong effort to address the state's climate risks.

“We have a historic opportunity to utilize insurance markets to protect Californians from the threat of climate change, including rising sea levels, extreme heat and wildfires,” Lara said in a statement. “Working with the United Nations, we can keep California at the forefront of reducing risks while promoting sustainable investments.”

The U.N. initiative puts “sustainability” at the heart of risk management. Establishing sustainable communities generally relies on development that does not deplete natural resources. Projects that have a carbon-neutral footprint - and thus contribute little or nothing to climate change - are often credited for heading in this direction.

But achieving sustainability has a lot to do with where things are built, and that has long been a volatile issue in California - now as much as ever.

The collaboration was announced at a roundtable discussion co-hosted by the UCLA School of Law and UC Berkeley School of Law, though statements following the session didn't get into specifics. But while the partnership likely will explore what can be done to combat climate change, the risk equation is sure to be a lot about location, location, location in the coming decades.

Some of California's most high-risk areas in the decades to come - the beautiful rolling hills inland and sparkling coast - are among the most desirable places to live. Stopping people from building there, let alone eventually moving them out, may be impossible.

Recent history suggests drafting state policy on this will be difficult. Legislation designed to force local governments to change zoning policies to allow denser residential development to alleviate a housing crunch faced a strong backlash and was defeated. Taking wide swaths of the state out of the development picture would be even more controversial.

If current and future residents are unable to obtain insurance, pressure will grow for the government to step in. Already, an increasing number of people are turning to the state-controlled insurance of last resort - Fair Access to Insurance Requirements, or FAIR - where the policies are limited and can be more expensive than typical coverage. Insurance companies are required to pay into the FAIR fund.

That doesn't seem sustainable, especially when insurance companies are pulling out of entire areas at high risk of wildfire. Insurers are fully aware that most of California's worst wildfires have burned since 2000 and that the trend is expected continue.

“There are a lot of companies that are non-renewing entire ZIP codes,” Joel Rahm, a San Diego-based agent with Wateridge Insurance Services, told the San Diego Union-Tribune.

The Zillow real estate marketing firm says nearly 500,000 California homes worth a combined $268 billion are at serious risk from wildfire, the Sacramento Bee reported.

Eventually, perhaps, if insurance is unavailable in certain areas, people won't build or buy there, unless government subsidizes the premium - which goes on the taxpayers' tab.

Some residents in the backcountry who are scrambling for insurance are suggesting the state should get more involved now.

Such panic is not found along the coast because the big impacts of sea-level rise are still years in the future.

“In my world right now, there's not a lot of discussion of the coast,” said Brian Crumbaker, an independent agent based in Carlsbad with Brightway Insurance.

He predicted anxiety will build as the sea creeps toward areas projected to be regularly flooded or submerged. But he said residents and governments should be giving that more consideration now - particularly in determining where not to build.

“We tend not to care about stuff until it happens,” he said. “It's almost like the wildfires came out of nowhere and that's just not the case.”

Seaside cities are facing pressure from the California Coastal Commission to come up with plans to deal with the rising ocean. The plans themselves are controversial because merely admitting that a street or neighborhood is likely to be regularly flooded, or worse, in the decades to come raises concerns about plummeting property values.

Some advocate a policy of “managed retreat” - moving existing development away from the shore over time - but that, too, predictably has run into resistance.

The cost and availability of insurance likely will have a role in how all that plays out, as it will in wildfire country.

The world's largest reinsurance firm, Munich Re, generated a lot of attention when it concluded that global warming made a “significant contribution” to the more than $20 billion in losses last year from California wildfires. More than 100 people died as a result of the fires - 85 of them lost in the Camp fire that devastated the town of Paradise.

“No insurer has linked wildfires to climate change before,” according to the Guardian, “although a Lloyd's report into Superstorm Sandy in 2014 found that global warming-linked sea level rises had increased surge losses around Manhattan by 30%.”

Five years ago, the chairman of Lloyd's of London wrote an opinion piece putting the industry on notice: “Insurers must adapt to climate change.”

Michael Smolens is a columnist for the San Diego Union-Tribune.

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