Today, Explained - California is becoming uninsurable

Episode Date: June 7, 2023

Two insurance giants will stop issuing new policies for California homes. CalMatters reporter Ben Christopher and Vox’s Umair Irfan say insurers have determined what homeowners refuse to accept: Climate change has made some parts of the country too risky to live in. This episode was produced by Avishay Artsy, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Michael Raphael, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Like a good neighbor, State Farm is there. Unless you want to own a house in California. You're in good hands with Allstate. Not if you want to buy a house in California. State Farm and Allstate recently, to the shock of many, announced they won't insure new homes in the Golden State. California homeowners didn't get much of a heads up, and so the announcement kind of freaked out a lot of people. Insurance is a risk business, and climate change has made it too risky.

The main culprit in California wildfires is not just a California problem. If you live in the Northeast United States, you've noticed a gray pall and the smell of smoke that's drifting down from fires in Canada. You can take comfort in the fact that you have homeowners insurance for now. Ahead on Today Explained are insurance companies finally telling Americans what state and local governments refuse to, that some places in this country have become

too risky to live in. The all-new FanDuel Sportsbook and Casino is bringing you more action than ever. Want more ways to follow your faves? Check out our new player prop tracking with real-time notifications. Or how about more ways to customize your casino page with our new favorite and recently played games tabs. And to top it all off, quick and secure withdrawals. Get more everything with FanDuel Sportsbook and Casino. Gambling problem? Call 1-866-531-2600. Visit connectsontario.ca. It's Today Explained. I'm Noelle King. Ben Christopher writes about California housing for the news site CalMatters. And he tells us that State Farm made its announcement late last month on a Friday afternoon,

which if you work in news, you know means it is news you would like to vanish from the radar quickly. I asked Ben what reason State Farm gave. So State Farm laid out three main reasons it was not doing new business in the California home insurance market. Number one, historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market. In other words, kind of a toxic combination of all factors. All three of these things, they kind of boil down to the same underlying issue, which is wildfire risk. Wildfire risk. Okay, explain construction costs outpacing inflation.

Why do construction costs matter here? Yeah, so the high cost of construction makes rebuilding really expensive in California. Rising construction costs are not specifically a California issue. We've heard a lot about inflation and supply chain bottlenecks. There was a run up in the prices for lumber earlier during the pandemic, but the prices of other raw materials have gone up as well. And in California specifically, there is an overall shortage of workers in residential construction. That's one of the many, many, many reasons that building in California is so expensive. And so construction costs are high in California. But from an insurance company perspective, that's really only an issue if you need to rebuild a bunch of homes all at once, as you would after a big fire. After fire, okay. Growing

catastrophe exposure, the second one. You said it's basically wildfires. California does have other problems. Flooding has been an issue over the winter. We saw some of that. Would fires be the sole thing that they're pointing to? Yeah, fire is the biggie. I mean, everyone knows California has earthquakes. We're the earthquake state. Right. But fire is the big one. The threat of wildfires has grown every year, ripping through forests, scarring hillsides, destroying whole communities. It's the one that's getting much more expensive, much worse. To put that in perspective, of the top 20 most destructive wildfires in California history in terms of the number of buildings destroyed, 13 of them have been since 2017.

And then these companies are also citing the reinsurance market, which means what exactly? Yeah, so reinsurance is just insurance that insurance companies buy for themselves. Let's say an insurance company is doing business in rural California or in another kind of high-risk area like the Gulf Coast, and all of a sudden there's a big natural disaster and the company gets hit with tens of thousands of claims all at once.

If they have reinsurance on those policies, that means they don't have to pay out the entire bill. They can pass along some of the cost to this other company. And depending on how big the natural disaster is, without reinsurance, that could throw the company into bankruptcy. So it's a protective measure. The problem is that the people who run reinsurance companies, they read the news too. And they know that California's wildfire problem is not going away anytime soon. And so the cost of reinsurance has gone up as well, making it much more costly, much more risky for insurance companies to sell insurance in California.

If I'm a homeowner in California or I plan on moving to California and buying a house, what does this mean for me? Well, so if you are a homeowner and you have a state farm policy right now or an all-state policy right now, you are good for now. So for now, this is a no new customer policy. Insurance companies do renew their policies every year. Whether this means that State Farm is going to get more picky about who it covers when it comes time to renew, we don't know yet. But for now, this is just for new customers. State Farm and Allstate are both large companies, you know, kind of household name companies. How big a deal is this for people in

California? Do they have other choices? They do, but State Farm is the biggie. They are the biggest player in the state's home insurance market. As of 2021, which is the last time this data was made public, they had about 20% of the home insurance market in California as market share. And that's in part why this was seen as such a big deal, even though they're hardly the first to rethink their exposure level in California. So you had AIG, they announced that they were getting out of the California home insurance market entirely last year. We mentioned Allstate, They made their announcement last year, although no one really noticed it at the time.

And then really going back to 2017, you've had this more under-the-radar, selective drawdown across California with insurance companies telling customers, particularly in fire-prone areas, that they wouldn't be renewing their policies. And that's left many parts of California, in particular rural California, as these kinds of insurance deserts where home

insurance policies are just either astronomically expensive or not available at all. Insurance companies are in business to make money, right? We can all acknowledge that. I think that's true. Why can't the insurance companies just do what companies normally do when a thing costs them more dearly and raise everybody's premiums? Yeah, well, they would really like to do that. But California, like a lot of states, has a Department of Insurance that regulates many insurance markets and has to approve proposed rate increases. In California, like 10 other states, we elect our insurance commissioner, whose job it is to regulate most of the state's insurance markets and to approve any rate increases. So all insurance premium hikes in the home insurance market have to go through the state's Department of Insurance. And particularly as wildfire costs have increased, you've had insurance industry groups complaining that California's commissioner has not allowed them to charge the rates needed

to make covering homeowners in California worth it. Incidentally, State Farm back in February requested an almost 30 percent rate hike that's still pending. Consumer groups are saying that State Farm is basically trying to publicly pressure you into approving some of the rate hikes that they were proposing right in the ballpark of about $700 million? Do you think they're trying to pressure you into approving those? Absolutely not. Look, we have... People didn't pay attention to that much at the time. Now people are realizing, oh, well, maybe that was an indication of where things were going. State Farm didn't mention rate hikes in its announcement when it said that they were pulling back a bit from the California market, but that's the other side of the equation. We were talking about the

different rising costs, but their ability to pass those costs along to customers is pretty restricted. Why would these companies put a stop to new insurance policies in the entire state and not just restrict it to the areas where wildfires have been a problem? There are a couple of possible reasons. So one is, we think of wildfire as this fundamentally rural problem. Increasingly, it's not, both because of development into these wildland areas where wildfires are at risk, and also just because wildfire, as a result of climate change and forest management, is becoming more of a suburban problem. So the San Francisco Bay Area suburbs, the hills above Oakland, suburban San Diego, the Inland Empire, which is the fastest growing part of the state, these are all places that have seen big destructive fires in recent history.

The other issue is that since the 1960s, California has had a state-sponsored insurance company of last resort called the Fair Plan. And the Fair Plan offers really expensive and skimpy coverage, but if you're someone who cannot buy insurance from anywhere else in the state, you can always fall back on the Fair Plan. And so now the Fair Plan is saddled with a bunch of the riskiest home insurance policies in the state. And the question is, if there is a massive wildfire season and the Fair Plan runs out of money, what happens? And legally, the answer is the Fair Plan is funded by putting fees on private insurers that are doing business in California in proportion to their market share. So the bigger you are in California, the more you would have

to pay to bail out the fare plan. And if and when that needs to be bailed out, that could be really, really expensive. And so that might be another reason that the big players like State Farm would want to pare back its overall exposure in California, not just in the high-risk areas. California already has a terrible housing shortage, by a lot of measures the worst in the country. And I wonder whether the knock-on effect of this over time is that fewer homes get built in California. Yeah, this doesn't help. Most people need a mortgage to buy a house.

Lenders generally don't offer home loans without insurance. California actually experienced something like the worst-case scenario version of this back in the mid-'90s. We had a big earthquake in Southern California. It struck without any warning. Evacuate now! The deadly Northridge earthquake ripped through the Southland while most people were asleep, flattening freeways, bursting gas lines, and squashing buildings. Insurance companies decided to stop doing business in California basically all at once,

and the entire real estate market just kind of ground to a halt across the state because no one could buy a home, because there wasn't insurance available. We're not there yet, but we have been seeing this kind of slow motion version. Unfortunately, the solution to this current problem proposed both by insurance companies but also a lot of independent policy experts is that insurance companies need to be allowed to charge more commensurate with the increasing risk in California. But that's not a super appealing option either. As you mentioned, California, it's a really expensive place to buy a home. It's already prohibitively expensive for most people. So layering on this new higher cost on top of that is not great for would-be homeowners. And for an elected insurance commissioner in California, it's really bad politics too. There are some challenges, but we're working on them.

And I'm very confident we're going to bring these companies back. One of the really interesting things here is that the market has now started to move on climate change. We will no longer insure homes in the state in a way that the state itself is not doing. California isn't saying, well, you can't build a home in this wildfire zone. You've just got to find your own insurance. In America, we do often defer to markets, and I wonder, do you think that this could change or move the needle in a way on how California starts to think about climate change and about what's necessary? Does the market lead the state in this case? Yeah, to a certain extent, that is a possibility here where rather than having a sort of top-down, perhaps more thoughtful, policy-led reconsideration of where development happens in California. It is

being led simply by the increasing cost of insurance. That's probably not the most desirable or least costly way to manage this change that might be foisted upon the state. But at the moment, they do seem to be leading this reconsideration of where homes get built. You are our man in California for the purposes of this episode. So let me ask you, can you imagine the state of California at some point saying there will be places in this state where people simply cannot have houses? There was actually a legislative proposal just this year to put new restrictions on where you could develop in what's called the wildland urban interface, which is basically just rural areas that are at most risk of wildfire while

prioritizing development in their urban areas. The bill died. And so at least for now, it's not a politically feasible proposal to make. But as wildfires continue to get worse and as insurance costs continue to increase, perhaps that political calculation will change. That was Ben Christopher of CalMatters. This is not just happening in California because climate change is not just happening in California. Coming up, what managed retreat looks like. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to

keep up with family, and Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an AuraFrame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an AuraFrame for himself. So setup was super simple. In my case, we were celebrating my grandmother's birthday.

And she's very fortunate. She's got 10 grandkids. And so we wanted to surprise her with the AuraFrame. And because she's a little bit older, it was just easier for us to source all the images together and have them uploaded to the frame itself. And because we're all connected over text message, it was just so easy to send a link to everybody. You can save on the perfect gift by visiting AuraFrames.com to get $35 off Aura's best-selling Carvermat frames with promo code EXPLAINED at checkout. That's A-U-R-A-Frames.com, promo code EXPLAINED. This deal is exclusive to listeners and available just in time for the holidays.

Terms and conditions do apply. BetMGM, authorized gaming partner of the NBA, has your back all season long. From tip-off to the final buzzer, you're always taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season.

Raise your game to the next level this year with BetMGM, a sportsbook worth a slam dunk, an authorized gaming partner of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager. Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge.

BetMGM operates pursuant to an operating agreement with iGaming Ontario. I just wanted a policy! It's Today Explained. I'm Noelle King. Umair, go ahead and give me your full name and tell me what you do. My name is Umair Irfan, and I'm a science reporter at Vox. Okay, so we've just spent a couple minutes talking about California and insurers there, large insurers there, saying we simply won't insure new homes. Are there other parts of this country where insurers have said, nah, not worth it? Oh, absolutely. And this has been a trend that's been going on for a few years,

particularly in coastal states around the Gulf Coast, namely Florida and Louisiana. They've seen some of the biggest declines in insurance coverage in recent years. Insurance is regulated at the state level, and regulators have to balance basically the business case for insurance, you know, how much they pay out versus how much they take in, as well as the policy case, basically how much people can actually afford to pay. And in a lot of cases, you know, the insurers are telling the state regulators that they can't balance their books based on the amount of risk that they're facing. In coastal areas, that makes a lot of sense that, you know, hurricanes, particularly in areas like the Gulf Coast,

are causing a lot more damage. And that's because populations are growing in those vulnerable areas. About 40% of the U.S. population lives in a coastal county. About 80% of the U.S. population lives within 100 miles of a border area. About 80% of the U.S. population lives within 100 miles of a border area. So not just direct damage, but indirect costs from lost business and revenue. Those are big things that are really vulnerable to a lot of climate and disaster linked events. And so these insurance companies are just saying that the business landscape is just impossible for them to operate in with the constraints that they're facing. In the first half of the show, we were talking to Ben Christopher about California's fare plan.

If you can't get insurance through anyone else, the fare plan will insure you. Do other states have things like that or is it just California? Several states have developed a system where they have an insurer of last resort, and that's basically what it sounds like. If nobody else will provide you a policy, the state will. The trade-off, though, is that these are very expensive policies, that they're usually something that a lot of people can't easily afford, and they're meant to also serve as a signal that you're going to have to pay for it because you're facing higher risk. And maybe buying insurance may not be the best way forward that you should think about relocating or potentially investing in hardening your infrastructure against things like sea level

rise or building a larger defensible perimeter against wildfire. But in most states that do have an insurer of last resort, they only insure a tiny fraction of properties. So it's mostly the people who are most desperate or the people who have the most money who can actually avail themselves of the service. It is the nudge thing that's so fascinating to me. It's the state saying, listen, if you can't find another insurer and we're going to charge you up the wazoo, maybe you shouldn't be buying that home. Maybe you shouldn't be building in that area, as opposed to the state simply saying, no, the insurance company says that place is too risky for you to build your retirement home.

Companies won't insure you. We're not going to insure you either. You cannot buy there. Has the state ever just said we're shutting it down? I mean, states have tried, but property developers are a powerful political constituency in most states. Several years ago in North Carolina, for instance, they started trying to factor sea level rise into their forecasts for coastal damages. And when they started doing that, the insurance rates for coastal properties went up. In 2012, North Carolina passed a law banning the state from making policy based on predictions of rising ocean levels. And so that raised a lot of consternation and mockery at the time. I think this is a brilliant solution. If your science gives you a result that you don't like, pass a law saying that the result is illegal. Problem solved.

But it shows some of the tensions that these regulators and state officials and property developers are all facing right now. And similarly, for individual homeowners, we try to send a signal, but it's not really easy to pick up stakes and move. If your insurance rate goes up, we've seen more often than not, people just let their insurance coverage lapse. We saw that happen last year when the federal national flood insurance program actually started to raise their premiums. The majority of Florida homeowners who may start seeing huge spikes in their flood insurance rate, 1.7 million Floridians have bought policies through FEMA's national flood insurance program. And it's not just impacting waterfront mansions. The number of homeowners basically who said that they couldn't afford the new premiums,

they didn't move. They just stopped paying for insurance. And now if there is a flood, knowing that there's a higher risk of flooding, they're just going to be out of luck if that happens. For a time now, it has seemed like the government has ignored the market and said, OK, as in the case with wildfires or floods in some part of the country, we will help. What do you think this is telling us, that the government is willing to step in where companies won't? It shows that, you know, there is, again, a tension between the business model and the public interest here.

The National Flood Insurance Program is a federal program, and that was created because very few private insurers would offer flood insurance at all. Now, the problem with the federal flood insurance program is that they try to subsidize the rates, but that's not enough to cover their books. The flood insurance program has been in debt for a very long time. Congress wrote down about $16 billion of flood insurance debt in 2017. The program still has about $20 billion in debt right now, and they even raised their rates last year, and it's still not enough to cover their books. Now, the federal government basically has a blank check to continue doing these kinds of things.

But again, if you're a private insurer and you're looking at billions of dollars in debt, that's not something that you can sustain. And so obviously, there's something of a public interest and private business mismatch here. And it's likely that something has to give. A couple of years ago, you wrote a piece for Vox about something called managed retreat. Can you explain what managed retreat is and how it might fit in here? Well, managed retreat is this idea that we start pulling back from vulnerable areas, areas that are extremely prone to wildfires, areas that are likely to see a lot of flooding, not just in coastal areas, but maybe along river

banks, for instance. And essentially, we try to encourage homeowners to move. We buy out their properties, compensate them, and try to relocate them to areas that are safer. Or for the people that don't move, we help subsidize investments to make them more resilient to things like wildfires and flooding. The problem is, of course, that it's expensive to do this. And also people don't want to move. They move to these regions to begin with for a reason that either the places where they can afford or, you know, they value the waterfront property or they enjoy being close to the wilderness areas. Those are the exact selling points that brought them to that area in the first place.

And it's been a little bit more difficult to do that. And so they try to use these nudges, but those nudges can only go so far given the powerful economic forces that force people to stay. And so the question then is just like, how do you do this? I mean, I think there's also the equity question that people who can afford to buy homes, especially in these expensive areas, maybe they should be paying for their own resilience. They should be paying for their own retreat rather than the taxpayer helping them out here.

But at the same time, you know, people have to live somewhere and it's really hard to find a place that isn't going to be vulnerable to some kind of risk at some point in the future. We've seen, you know, wildfires in the Midwest this year. We've seen epic dust storms, drought. Arizona recently, in Phoenix, they said that they're going to stop development in that area because they're worried about running out of groundwater. So there are some kinds of backstops. There are some limits to what we can do. But the question is, what do you do with the existing property? What do you do with the people who are already living there? And that is really a big conflict that's brewing. It's already starting to happen. I mean, in the United States, we do have climate

refugees, effectively. In some of the barrier islands around Louisiana and in the Gulf Coast, Ile de Jean Charles, there's already an indigenous native community that's being federally relocated. It is the first federally funded community relocation in the country, brought on by sinking grounds and rising sea levels along Louisiana's disappearing coast in crisis. They're having some of their property bought up and they're being moved towards areas further inland into other areas. We're seeing some of this happening with indigenous communities in the Alaskan barrier islands. But these are, you know, very small piecemeal projects. And they're happening to, you know, scattered communities, we're not seeing the sort of wholesale relocation you would need for protecting a city like Miami, for instance, that's right there on the waterfront. But we do have some of this

processes already underway. And obviously, you know, there's a lot of tension there as well. I mean, people have a very strong sense of place that, you know, you lose that when you're forced to relocate when your home is being swallowed up by water or destroyed in a disaster. And so there's also this sort of mental health problem here that we also have to deal with this sort of social dislocation that we're also starting to see as well. And we're just beginning to grapple with that. That was Vox's Umair Irfan. Today's show was produced by Avishai Artsy

and edited by Matthew Collette. It was fact-checked by Laura Bullard and engineered by Michael Raphael. I'm Noelle King. It's Today Explained. you