Insurers lessen climate related insurance

by Zain Jaffer

As someone intimately involved with real estate, I watched the recent January 2025 wildfires in Los Angeles county with close interest. Not just from a business perspective, but also from a personal one. Many of us know friends, acquaintances, and loved ones who live in Los Angeles county.

I view with concern the decision of several insurance companies to pull coverage from areas they deem to have significant risk of climate related damage [https://www.nytimes.com/interactive/2024/12/18/climate/insurance-non-renewal-climate-crisis.html], although they have recently announced that they will continue to support some of their affected policyholders. For Southern Californians affected by the recent fire, this coverage pullout becomes especially painful [https://edition.cnn.com/2025/01/09/business/california-wildfires-homeowners-insurance/index.html].

Specific to California, which impacts all those who lost their homes in Southern California, there is something called the FAIR plan [https://www.cfpnet.com/]. The FAIR plan is a state backed aggrupation of private insurers and their policy holders. Californians affected by the recent fires who could not qualify for regular insurance will generally end up with FAIR coverage. According to their charter, if the FAIR funds run out, they can tap other Californians policies which would impact everyone statewide in terms of policy increases.

It is understandable from a business perspective why private insurers would pull coverage. Insurance is a business, where the assumption is through historical actuarial tables, that there would only be a small percentage of claimants in a given year. This means that most policy holders are paying the insurance company without claiming, so that ends up as profit for the insurer.

However when climate related damage moves from not likely to significantly probable, then that changes the equation for insurers. That means their statistical actuarial assumptions have changed, and they either need to charge higher premiums, or pull coverage in that area. Reinsurance, which spreads the risk to other insurers, is part of the answer. However even with reinsurance, the sheer magnitude of the Los Angeles county fires might still put that system to extreme stress.

Reinsurers are there to back up insurance companies in the event they need help. Maybe the US federal government, already saddled with a lot of deficits, may add something especially since it might not be politically tenable not to do so. Unfortunately most likely because of the massive scale of damage, these fires may lead to more exclusions and provisions in policies, higher annual rates for everybody, and more areas where regular insurance is not available.

Basically more people need to pay for higher risks just so it makes sense.

Insurance however is not just a business. It is a regulated industry that also has a strong public service component. State insurance commissions try to balance the need to keep private insurers solvent versus the needs of ordinary citizens to have reasonably priced policies. However if climate change has upended the risk tables, then the policy rates will definitely need to go up.

If you need a mortgage to buy a house, you cannot get one if you cannot get insurance to protect the mortgage issuer. Unfortunately in many areas at significant risk of climate related damage, they will not sell you a policy. Or if they do, the premiums will be extremely high.

I hope that without bankrupting these insurers, there can be a way for policy holders to still make claims. Mortgages for example do not stop charging monthly payments just because a house has burned down. These loans still need to be paid. The intent of insurance is to allow either these houses to be rebuilt, or to pay down the mortgage.

Some people prefer to move to other places for their mental sanity, while some choose to stay to rebuild their community. Insurance plays an important part of allowing these people to do that after a disaster.

The questions and the answers that will come from massive disasters like the Los Angeles county fire will come after the disaster has abated. There are many families that have been affected.

I hope for everyone’s sake that insurers step up to the plate to cover their claimants while at the same time be entitled to make a profit through proper premiums that are allowed by laws in particular areas.

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