LA Fires Threaten California Insurance Market Stability, Housing Costs

In a statement emailed to KQED, a FAIR Plan spokesperson said they are aware of what they called “misinformation being posted online,” but added that it is “too early to provide loss estimates as claims are just beginning to be submitted and processed.”

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“The FAIR Plan has payment mechanisms in place, including reinsurance, to ensure all covered claims are paid,” the statement said. “The FAIR Plan remains vigilant in working with its customers in these challenging times.”

State’s insurance regulators have been implementing a massive overhaul of insurance rules designed to ease the crisis in the insurance markets and to allow companies to charge what they think aligns with the risk exposure. In response, some companies are loosening up, offering more coverage to attract customers. The fires could back track that progress.

The past year has been accompanied by eye-popping rate increases, particularly areas with wildfire-risk. But Wara said the worst is likely ahead of us.

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“The rate increases we’ve had, which have been extreme, especially for the people in the high-risk areas, such as the Sierra or Pacific Palisades, but that is a preview at this point of what is to come,” Wara said.

Customers and insurance companies are likely to feel the pain. Companies often use reinsurance — insurance for insurers — to guarantee they’ll have enough money to payout claims.

“Insurance companies in a catastrophe are like a bank during a bank run,” Wara said. “And as long as you have enough money in the vault to survive the bank run, you’re OK. But reinsurance means you can keep less money in your own vault because someone else’s vault is available to you.”

However, seeing this destruction could prompt reinsurance companies to pull back further from California, which would mean insurance companies either have to raise that capital themselves or further reduce their exposure in the state.

While the state regulates insurance companies, it does not get to exert the same level of control over reinsurers. Nor does the federal government.

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Insurance is already pricey in California. Make it much worse and it could become too expensive for many people to own a home here.

“There are places in Florida where insurance costs $50,000 a year,” Wara said. “If that were to happen in California in the wildland urban interface, we would be in a very different kind of challenge.”

What has been, until now, an insurance problem could balloon into a homeownership problem, where middle- and working-class people can’t own homes because mortgage, insurance and property taxes simply become too much.

“And [then] you have to sell your house,” Wara said. “And you find that your home value has gone down a lot because the cost of owning your home, including taxes and insurance, is a lot higher than it used to be. And that’s where we might be heading. I hope not.”

But the chances that we are moving in that direction went up as soon as the fires broke out.