Ever since the words "insurance premium" began appearing on contracts in the Republic of Venice in 1255, modern global trade and now our broader society depend on insurance to mitigate risk of loss to enterprises and individuals for their business and personal property.
But as insurers retreat from areas made too risky for them by wildfires, hurricanes and floods supercharged by climate change, it becomes difficult to build new dwellings or continue operating businesses in disaster-prone areas.
A recent report complied by Deep Sky, a carbon removal company, illustrates just how bad things are getting in California. The key findings:
- Home insurance premiums have shot up 42% in the most fire prone areas of California [since 2009].
- One in five homes in extreme fire risk areas of California has lost coverage since 2019.
- Spring fire risk in the US Southwest and Northern Mexico has reached a ten-year record.
Not only are insurance premiums rising, but insurers are abandoning homeowners altogether with polices declining by 19 percent in the riskiest areas between 2015 and 2023. Some of the drop is insurers simply refusing to renew policies after they expire. Some 150,000 California households are now uninsured.
As the private insurance companies have withdrawn, the state of California has stepped in with its own plan to insure homeowners. The California FAIR plan essentially subsidizes homeowner insurance for California residents who can't get private insurance. (It's worth noting that the FAIR plans are bare-bones coverage for the dwelling only and exclude personal property, liability protection, and additional living expenses. Homeowners have to buy separate policies for that coverage.)
At least part of the funding for that subsidy is taken from private insurers via state assessments paid into the plan. That is leading to a cascade. As private insurers costs rise due to these assessments, they pass these along to policyholders who may find rising premiums force them to seek the more affordable insurance in the FAIR plan.
In addition, if claims to the state's FAIR plan exceed its resources, the private insurance companies are forced to make up the difference. This means the risk to the entire system continues to rise. There may come a day when California's combined home insurance sellers including the state's FAIR plan won't be able to pay full claims after a series of catastrophic events.
Simply moving liability to the government will not solve the problem and, in fact, may hasten the exit of private insurers from California as the payments they must make to the state to subsidize its plan grow larger. This is how insurance goes away, bit by bit. Addressing the issue, of course, means addressing climate change head on which we as a global society do not seem to want to do. That portends that large areas made uninsurable by climate change may end up abandoned.
Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He can be contacted at kurtcobb2001@yahoo.com.
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