This is not about piling on the mess in California. It’s about California being the canary in the coal mine. California’s insurers might die due to a lack of oxygen in the form of overregulation. Other state governments should pay attention to what’s happening in California before it’s too late. California inserted itself deeply into its insurance market, and insurers fled many of the highest-risk areas just before this disaster. How might your state have fared in a similar situation, not necessarily wildfires? The editors of The Wall Street Journal explain just how badly California’s politicians have disrupted the state’s insurance market, writing:
The politicians are blaming each other for the losses in the horrific Los Angeles wildfires, but the truth is that mother nature can be merciless. The stories about water shortages are conflicting and need more time to sort out. But it’s not too soon to note that California’s politicians have fueled a five-alarm insurance-market crisis that will hurt homeowners and taxpayers across the state once the fires have died out.
Hurricane-force wind gusts are fanning fires across Los Angeles County, especially the Pacific Palisades and Altadena, where 2,000 structures had burned by Thursday evening, and counting. At least five people have died, and tens of thousands of buildings are at risk. California’s Southland has rarely experienced such strong winds, and the past two wet winters have produced loads of combustible vegetation that has became tinder after recent dry months.
Such conditions have created a perfect storm that could become the most expensive wildfire disaster in U.S. history. The human tragedy is paramount. But the insurance losses will be in the tens of billions of dollars or more. The damage could topple the state’s undercapitalized insurer of last resort, FAIR. Private carriers are almost certain to increase premiums, cancel policies or withdraw from California.
Insurers had already scrapped hundreds of thousands of policies and limited coverage in wildfire-prone areas. Democrats blame climate change, which has become an all-purpose excuse for any disaster-relief failure. But the real insurance problem is that state regulators have barred insurers from charging premiums that fully reflect risks and costs.
California is the only state that heretofore hasn’t allowed insurers to incorporate the cost of reinsurance in premiums. Until this year, it had also prohibited insurers from adjusting premiums by using the standard industry practice of catastrophe modeling to predict a property’s future risk. Insurers could only assess premiums based on historical losses.
As a result, insurers are paying out $1.09 in expenses and claims for every $1 they collect in premiums. This is financially unsustainable, which is why many have pared coverage in areas at high fire risk with expensive homes. State Farm dropped nearly 70% of policy holders in one Pacific Palisades neighborhood where the average home price is $3.5 million.
Action Line: The implications of this fire on the finances of both insurers and governments in California could be massive. Will a federal bailout be on the table? Email me at ejsmith@yoursurvivalguy.com. But only if you’re serious.
