About a minute and a half into his talk, he notes that insurance companies are updating their assessment of the risks of floods or fires, and changing premiums accordingly. That's a phenomenon we've been noting for some time. In July, 2023, Common Dreams regular Brett Wilkins sounded the alarm. "Farmers Insurance Quits Covering Florida Property as Climate Crisis Worsens." Several other insurers have stopped writing policies in Florida. Common Dreams being Common Dreams, though, it's not the risk management that matters, it's that insurance companies hold a diverse portfolio of assets and insure a variety of properties.
Carly Fabian of the consumer rights group Public Citizen noted in a statement [last year] that "as Farmers Insurance exits Florida due to concerns over increasing risk from severe weather, the insurance industry continues to prop up the fossil fuel industry."That makes no sense. Would she rather that the insurance companies stopped insuring oil producers?
"Farmers has held significant investments in fossil fuel companies, and its parent company, Zurich, remains a top global insurer of oil and gas," she noted.//"Insurers pulling out of vulnerable markets continue to prioritize fossil fuels over homeowners and auto insurance policyholders, creating a crisis," Fabian continued. "This is reckless behavior by an industry that the public will be increasingly reliant on as the climate crisis intensifies."
"Regulators must push insurers to mitigate climate-related risks by reducing the industry's financing and insurance of the fossil fuel industry," she added. "Florida regulators and elected officials continue to stick their heads in the sand by criticizing financial firms who move away from fossil fuels."
Mr Smerconish called attention to insurance companies no longer writing policies, or changing the terms of policies, in four states, namely Florida, Louisiana, North Carolina, and California. Those changes preceded this summer's hurricanes. San Jose Mercury-News reporter John Woolfolk filed a story in March of 2024.
As home insurers flee California, the state’s last-resort insurance plan is warning that it’s being pushed toward insolvency, forced to cover a rapidly growing number of properties that have lost traditional coverage and unable to collect enough in premiums to cover potential losses.And there, dear reader, is the first masking of the risks. Mr Smerconish noted that Californian insurers do not have the freedom to raise rates; in his talk he suggested that Oklahomans were paying higher premiums in part to cover losses in California. That's probably inaccurate: Oklahoma is tornado country, even in years when Hollywood is not making movies about storm chasers, and to the extent a changing environment changes the risk of tornadoes, wouldn't premiums in Oklahoma change to reflect that?
The number of homes and commercial properties in high-risk wildfire areas covered by the California FAIR Plan has more than doubled, from 154,000 in 2019 to 375,000, and liability exposure has ballooned from $50 billion in 2018 to $336 billion in February, its president told lawmakers at an insurance committee hearing last week.
“These are huge numbers,” California FAIR Plan President Victoria Roach told the committee. “And they continue to grow. … As those numbers climb, our financial stability comes more into question.”
Roach added that one bad wildfire or even a series of smaller fires could overwhelm the plan’s resources, forcing it to bill all the state’s insurers for liabilities it cannot cover, which they in turn would pass on to all their insured home and business customers as higher premiums.
“It’s a gamble,” Roach said. “We are one event away from a large assessment, there’s no other way to say it, because we don’t have a lot of money on hand, and we have a lot of exposure out there.”
The FAIR Plan’s financial instability has emerged as collateral damage from the state’s insurance market meltdown. Major carriers have discontinued or restricted coverage in recent years following a series of costly wildfires — 14 of California’s 20 most destructive wildfires burned the state in the last 10 years. That’s forced property owners who’ve lost coverage onto the FAIR Plan in rapidly growing numbers — with 1,000 applications now every work day.
Note in Mr Woolfolk's story that although California's insurers cannot accurately price the risk of living in an inflammable wind tunnel with a pretty view of the ocean, when that bad wildfire comes, look who ends up as the real collateral damage. For not very much.
The state created the California FAIR Plan in the 1960s in response to insurers refusing to cover inner-city businesses following riots in Los Angeles’ Watts neighborhood. It’s a nonprofit association of all the state’s authorized property insurance providers, chartered to provide temporary basic insurance for properties deemed so high risk that companies refused coverage.Reality, though, is optional in California.
The FAIR plan isn’t tax supported, and its bare-bones coverage — just fire and smoke damage — is paid from policy premiums that can be much more expensive than regular insurance because the risk pool is much higher.
The plan also isn’t subject to the insurance regulation under Proposition 103, the check on rates voters approved in 1988. But it is regulated by the state legislature and its rates approved by the elected insurance commissioner, though not under the review of consumer groups, which can intervene on regular policies.
Roach said that the FAIR Plan has encountered the same problems as regular insurance providers in getting policy rate increases approved to provide enough revenue to cover its risk exposure. Approvals take too long and don’t allow the plan to include the cost of reinsurance — which helps insurers absorb losses — or to factor in catastrophe risk models.
[I]n 1988, California voters passed Proposition 103, arbitrarily reducing rates by 20 percent and subjecting future rate increases to public oversight. Nobody likes high premiums, of course. But the politicization of risk has been a catastrophe. Artificially low premiums encouraged more Californians to live in the state’s most dangerous areas. And they reduced the incentive for homeowners to protect their houses, such as by installing fire-resistant roofs and siding materials.That's Market Urbanism's Nolan Gray, writing for The Atlantic.
And reality bats last. "The state is suffering an insurance crisis, because Gavin Newsom and California Democrats refused to let insurers do proper pricing for risk."
The private insurers stopped writing policies in Pacific Palisades, and what happened next was not amusing.
Last year, Francis Bischetti said he learned that the annual cost of the homeowners policy he buys from Farmers Insurance for his Pacific Palisades home was going to soar from $4,500 to $18,000 — an amount he could not possibly afford.It wasn't. Reason's Steven Greenhut had a pretty good idea what would happen next.
Neither could he get onto the California FAIR Plan, which provides fewer benefits, because he said he would have to cut down 10 trees around his roof line to lower the fire risk — something else the 55-year-old personal assistant found too costly to manage.
So he decided he would do what's called "going bare" — not buying any coverage on his home in the community's El Medio neighborhood. He figured if he watered his property year round, that might be protection enough given its location south of Sunset Boulevard.
Increasing numbers of Californians must now rely on the so-called FAIR Plan (Fair Access to Insurance Requirements), the state-created, industry-funded insurer of last resort—one that provides only barebones coverage.Well, that's California. Mr Smerconish alluded to what might happen in California's real estate market if insurers walked away and the assigned risk pool ran out of money. His fear? Another 2008-09 housing value crash. No fears, dear reader, Governor Newsom has already taken steps to prevent that.
The burdens on the FAIR Plan have become so severe—it has three times more insureds than it was designed to cover—that there's open talk about what happens if it fails. Insurance may be boring, but it's a necessity for just about everyone. Without a functioning insurance market, California's economy is in peril. Yet the state's response has been as useful as its response to most other crises.
Californians affected by the fires that have burned through Los Angeles County for over seven days now will be protected from predatory real-estate investors under a new order signed by Governor Gavin Newsom.Presumably somebody who wants to cash out will be able to solicit a cash offer, although whether California authorities will butt in and void voluntary transactions that some functionary deems "predatory" remains to be seen. That comes after California officials also prohibited those insurers still writing policies from changing their rates or withdrawing their trade.
The Democrat issued an executive order on Tuesday, which will allow the Golden State to hold predatory land speculators "making aggressive and unsolicited cash offers" to wildfires victims accountable "through stronger enforcement and prosecution," according to a press release.
At the end of last year, California issued emergency new insurance regulations giving insurers more freedom to raise premiums while also requiring them to extend coverage to wildfire-prone areas of the state.We're dealing with California, and Noah Smith takes a dim view of insurance regulation in that state.
The hope was that this compromise of higher premiums and more coverage would set right the crisis of insurers fleeing the state and leaving homeowners with no private options for financially protecting their homes from the next disaster.
The reality is that these reforms might be too little and come too late. Now, the still-burning Palisades and Eaton fires (estimated to have caused $150 billion in damages) seem to be pushing politicians back into their old, bad habits of bullying insurers into doing business in California.
This past Friday, California's elected insurance commissioner, Ricardo Lara, issued a moratorium on insurance companies canceling or not renewing policies in areas affected by the Palisades and Eaton fires.
"I am using my moratorium powers to prevent insurance companies from canceling or non-renewing policies in wildfire-impacted areas, so people don't face the added stress of finding new insurance during this horrific event," said Lara.
Insurers can deal with [correlated risk and counterparty risk] in two ways. First, they can raise premiums, based on models that take the worsening fire environment into account. Second, they can use reinsurance — they can buy their own insurance from truly giant insurance companies, so they don’t go bankrupt in a bad year.That post opens with an instructive exposition of how insurance works. Our prosperity rests on a number of institutional pillars, including being able to value risk and divide it. We have had a half-millennium of practice at doing precisely that. But Mr Smerconish brought on Rhode Island's senator Sheldon Whitehouse to tout more involvement from Washington into the pricing of insurance, based on the policy preferences of a Democrat majority.
Except in California they can’t actually do either of these things! In 1988, California voters passed a ballot proposition called Proposition 103, which says that if insurers want to raise their premiums, they have to get the raise approved by the government first. This means that if premiums go up, California voters will blame the insurance commissioner, who is democratically elected. So naturally, the commissioner tries to keep voters happy by forbidding insurance companies from charging higher premiums. In recent years, insurance companies have been begging California Insurance Commissioner Ricardo Lara to let them charge higher premiums in order to account for the increased risk of large fires, and for the reinsurance premiums they now have to pay. But Lara forbid them from doing so.
In early 2023, the Senate Budget Committee began a series of hearings examining the risks that climate change poses to insurance, mortgage, and property markets in coastal and wildfire-exposed communities. The Committee organized these hearings in response to growing reports of turbulence in insurance markets in Florida, Louisiana, California, and Texas. Since these first hearings, reports have continued to mount about rising premiums and fleeing insurers in these states. In November 2023, the Committee launched an investigation into homeowners’ insurance market conditions across the country to better understand the geographic scope of the troubles affecting the market. The Committee focused on non-renewal data, as insurance industry experts had indicated that spiking non-renewal rates, even if still low in absolute terms, are often an early warning sign of market destabilization. Higher non-renewal rates are also correlated with higher premiums.Nowhere in that report, dear reader, do we see any suggestion that perhaps the best thing for the government to do is to go away. The senators warn us, "Coastal and Wildfire-Prone Areas Already Suffer from An Insurance Availability Crisis." There's probably a research opportunity for a suitably skeptical scholar to investigate the crowding-out effect of disaster relief on private insurance.
We saw an allusion to that phenomenon yesterday. It's Mike Davis who came up with "public subsidization of firebelt suburbs." The political economy of disaster relief has long been with us. "The federal government spends billions replenishing beaches for the affluent. The bill will soon skyrocket thanks to climate change."
In 2003, Reason's Matt Welch saw what was coming, and didn't like it.
But then, the whole project of Southern California living is one giant taxpayer-financed battle to stuff more than 20 million people into a water-scarce ecology with massive earthquake fault lines, fantastically steep mountains, and hillsides that desperately yearn to burn. Transferring some of those costs onto those of us happily foolish enough to live here makes sense. Getting the government out of the brush-fire insurance business—and introducing competition to underwrite millionaire Malibu residents—seems like a worthwhile first step.His colleague Joe Lancaster took a similarly dim view of the federal flood insurance. "It's high time for Congress to end a program that routinely goes into debt providing subsidies to wealthy people living in high-risk areas." Malibu is no poverty pocket. Nor are beaches sometimes swept by hurricanes, as Jack Nicastro noted, also in Reason.
At least 119 people have died as a result of Hurricane Helene as of Monday, reports CNN. While the Federal Emergency Management Agency (FEMA) is busy helping survivors in flood-stricken regions, its National Flood Insurance Program (NFIP) perversely incentivizes Americans to reside in these high-risk areas.He further notes, "Unaffordability is a feature of insurance markets, not a bug. High insurance rates discourage risky behavior that is likely to be even more painful than having to pull up roots."
People choose to remain in flood-prone areas for many reasons, including proximity to family, work, and school. Uprooting oneself and one's family can be a painful thing to do, and choosing to take on risk to stay where you've established your home is understandable. But choosing to stay in these areas genuinely does involve considerable risk.
Discourage does not mean preclude.
Absent insurance subsidies, it's likely there'd still be a lot of rich people willing to pay very high insurance premiums to live in large homes in semirural seclusion.Nor, should people of means build places in high-fire-or-storm-risk areas and flood, fire, or Force Ten strike, should they have any claim on federal moneys. Moreover, the use of federal moneys to crowd out insurance markets is contrary to Constitutional principles. Representative Crockett of Tennessee (yes, that Representative Crockett) learned that lesson from a constituent.
Properly priced insurance would certainly help incentivize more fire-safe building techniques and retrofits. But it wouldn't stop homes being built in high fire-risk areas.
“‘I admit the truth of all you say, but there must be some mistake about it, for I do not remember that I gave any vote last winter upon any constitutional question.’Fraud, corruption, favoritism, and now a heavily indebted federal treasury. I'll give Vance Ginn the last word, and the deep word.
“‘No, Colonel, there’s no mistake. Though I live here in the backwoods and seldom go from home, I take the papers from Washington and read very carefully all the proceedings of Congress. My papers say that last winter you voted for a bill to appropriate $20,000 to some sufferers by a fire in Georgetown . Is that true?’
“‘Well, my friend; I may as well own up. You have got me there. But certainly nobody will complain that a great and rich country like ours should give the insignificant sum of $20,000 to relieve its suffering women and children, particularly with a full and overflowing Treasury, and I am sure, if you had been there, you would have done just as I did.’
“‘It is not the amount, Colonel, that I complain of; it is the principle. In the first place, the government ought to have in the Treasury no more than enough for its legitimate purposes. But that has nothing to do with the question. The power of collecting and disbursing money at pleasure is the most dangerous power that can be intrusted to man, particularly under our system of collecting revenue by a tariff, which reaches every man in the country, no matter how poor he may be, and the poorer he is the more he pays in proportion to his means. What is worse, it presses upon him without his knowledge where the weight centers, for there is not a man in the United States who can ever guess how much he pays to the government. So you see, that while you are contributing to relieve one, you are drawing it from thousands who are even worse off than he. If you had the right to give anything, the amount was simply a matter of discretion with you, and you had as much right to give $20,000,000 as $20,000. If you have the right to give to one, you have the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any and everything which you may believe, or profess to believe, is a charity, and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other. No, Colonel, Congress has no right to give charity. Individual members may give as much of their own money as they please, but they have no right to touch a dollar of the public money for that purpose. If twice as many houses had been burned in this county as in Georgetown , neither you nor any other member of Congress would have thought of appropriating a dollar for our relief. There are about two hundred and forty members of Congress. If they had shown their sympathy for the sufferers by contributing each one week’s pay, it would have made over $13,000. There are plenty of wealthy men in and around Washington who could have given $20,000 without depriving themselves of even a luxury of life. The congressmen chose to keep their own money, which, if reports be true, some of them spend not very creditably; and the people about Washington , no doubt, applauded you for relieving them from the necessity of giving by giving what was not yours to give. The people have delegated to Congress, by the Constitution, the power to do certain things. To do these, it is authorized to collect and pay moneys, and for nothing else. Everything beyond this is usurpation, and a violation of the Constitution.
“‘So you see, Colonel, you have violated the Constitution in what I consider a vital point. It is a precedent fraught with danger to the country, for when Congress once begins to stretch its power beyond the limits of the Constitution, there is no limit to it, and no security for the people. I have no doubt you acted honestly, but that does not make it any better, except as far as you are personally concerned, and you see that I cannot vote for you.’
Should the federal government play such a dominant role in disaster management?As well as masking the risks people face, climate change or not.
The answer, increasingly, is no.
Instead, state and local governments and private charities are better suited to respond to disasters. Relying on FEMA has only deepened dependence on federal intervention while exacerbating the ongoing spending crisis in Washington.
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