There is a fundamental tension underlying the wildfire disaster playing out in California, and it's not going away. The tension is between climate change and human nature, as represented both in individual behavior and in the actions of our governments.
The damage from hurricanes, severe convective storms, drought and wildfires has grown even faster than expected over the past several years, and the increases show no signs of slowing. At the same time, we keep building in areas, such as along coasts and in the wildland-urban interface, that are especially vulnerable.
And that's just the start of our behavioral problems. We aren't wired very well for planning for crises like wildfires. You're telling me I have a 2% chance of wildfire in the 10 years I'm going to own this house, and I'm supposed to spend how many tens of thousands of dollars to harden the property? Even if the math makes sense, most people will glide past the issue.
In theory, governments step in and represent all of us on issues like wildfire that we can handle collectively better than we do individually. But governments will slow roll solutions that require hard choices. Job 1 as a politician is getting reelected, so why tick off voters by letting insurance companies raise rates rapidly or not renew policies on properties that have become too risky? Why not stall as long as possible?
So we have a crisis that's accelerating, and our response is moving at the same old, snail-like pace. I'd love to wish the tension away, but I can't. I suspect we'll be wrestling with this tension for many, many years, while wringing our hands about the devastation caused by events such as the wildfires in Southern California.
What I can do is offer a few thoughts on how we in the insurance industry can at least start to accelerate society's response, to mitigate the damage even as climate-related problems continue to proliferate and intensify.
To be clear, I'm not saying homeowners insurance is in crisis everywhere in the U.S. — but we're not just talking California, either. A recent congressional report said Florida, Louisiana and Texas face the same sort of climate-related insurance problems. Colorado officials have said they worry their state could fall victim to the sorts of wildfire problems that afflict California. Insurance markets in Hawaii, Massachusetts, Oklahoma, and North and South Carolina are also unstable, according to a recent report.
I'm also not saying insurers have been asleep at the switch about the growing dangers of wildfires. A New Yorker article says:
"In 2019, the number of homeowners’ policies in California that were not renewed jumped by more than thirty per cent. In 2023, two giant insurers, State Farm and Allstate, announced that they would stop writing new policies for various forms of property insurance in California. State Farm said the move came in response to inflation and 'rapidly growing catastrophe exposure.' Last summer, it canceled coverage for more than fifteen hundred homes in Pacific Palisades, the wealthy enclave where the first of the L.A. blazes began."
Seven out of the 12 insurers with the biggest market share have cut coverage in California since 2022.
What I am saying is that the tension between the acceleration of climate change and the slow response caused by human nature is overwhelming the signals that insurers are sending about increasing risks. As a result, the insurance industry isn't being as effective as it could be at heading off the economic and personal devastation of climate-related catastrophes.
What to do?
First, once the immediate danger is behind us, insurers should take the opportunity to argue for a suite of aggressive changes to the thinking about insurance in California and other states with climate-related insurance crises. This will be difficult, both because of the normal inertia and because so many people are spreading disinformation in the interest of scoring political points. (No, whatever you think of the state's policies on water and endangered fish, they didn't affect the firefighting efforts. No, however much you despise the billionaires who have bought up so much of the water rights in the Central Valley, they didn't affect the firefighting efforts. The reservoirs in the state are full or nearly fully, as usually happens during the rainy season.)
People tend to buy flood insurance after a flood and earthquake insurance after an earthquake, so we now surely have the attention of a lot of people about the growing dangers of wildfires. Let's use it.
California has recently made some important changes to insurance regulation. Insurers can now use predictive models when pricing home insurance, letting them account for climate change rather than having to rely solely on (outdated) historical data. Insurers can also include in filings the costs they pay for reinsurance. But those changes should just be the beginning of an acknowledgment that California's rates have been artificially depressed since voters passed Proposition 103 in 1988 and that premiums need to catch up with risk.
Second, insurers should use every means at their disposal to encourage those who are rebuilding their homes to build them to more resilient standards. Mike Zukerman, CEO of CSAA, the third-largest home insurer in California, says his company "offers guaranteed renewals to customers who achieve a Wildfire Prepared Home certification from the Insurance Institute for Business and Home Safety, which mandates home hardening measures. (There are about 1,000 such homes in the entire state, according to IBHS.)"
Building to the higher standard costs almost nothing, so let's get as many homeowners as possible to get those certifications.
Third, I'd love to build on Zillow's recent announcement that it will provide likely insurance costs up front in its listings, so prospective buyers can crank that information into their decision-making, rather than only considering insurance once they've completed the purchase. Insurance policies are annual, so, while Zillow's approach gives a homeowner valuable information, the information is just about the first year for what's likely a 30-year mortgage. We're getting better and better all the time at projecting the effects of climate change; why not provide guidance to homeowners up front about the whole 30-year lifetime?
Yes, the information will be imprecise, models will disagree and sellers will surely push back if they feel they're being maligned, but I'm idealistic enough to think there must be a way to make buyers more sophisticated at the time they're making key decisions.
An article in Fortune says:
"Climate science can help us figure out how to live well in a warmer world. The same models that accurately anticipated rising heat and humidity, increased drought and deluge, rising oceans, bigger tropical storms, elevated wildfire risk, and weakening jet streams warned sophisticated investors away from insuring the [long-tail risks that are geting fatter]. The same research and data can help decision-makers of all kinds integrate this information into processes as diverse as city planning, building codes, mortgage underwriting (including by FNME and FMCC), and REIT valuation."
Fourth, I hope risk management consultants can help communities stress test their plans for climate-related disasters. As far as I can tell as of this writing, the big failure of government in the California disaster was that the city of Los Angeles counted on its experienced firefighters and a system of water tanks and hydrants. The approach was fine if a house is burning down, even if several are burning at once. But a whole community? Several communities? You can't fight wildfires with a few water tanks.
Wouldn't that be useful? Come up with a simple methodology to help communities see how they'd handle a flood, a fire, a whatever? Then help them get the word out so they can better prepare, whether through a series of individual actions or through group efforts?
Chunka Mui and I have used a stress test methodology for years with corporate consulting clients and, just based on interviewing internal teams to surface concerns, have identified any number of efforts that were as clearly misguided as hoping fire hydrants could protect against wildfires.
We've also, I'm sorry to say, seen clients go ahead and spend tens of millions of dollars anyway on those brain-dead projects. One wasted billions of dollars by moving too fast into a market that, based on our devil's advocate review, was years away from being ready.
There's that human nature again.
I warned you this won't be easy.
Cheers,
Paul