MENDOCINO Co., 11/25/2020 — Ed Keller was sure there had been a mistake when he opened a letter from his home insurance company and read that his policy had been cancelled, and that purchasing a new policy would cost four times what he had paid in the past. Bewildered, he picked up the phone and called his provider, Mark Davis Insurance, to clear things up, only to hear from a company representative that it was not an error at all. Keller’s insurance premium had been hiked up by around 400%, from around $1,000 to just over $4,000 per year.
His story is by no means unique. Across California, almost one million homeowners have received notices of non renewal since 2015. Short of serious intervention, insurance experts, consumer advocates, and state agencies only expect this to continue.
Keller, 71, was lucky. Both he and his partner still work, and they were able to afford the pricier insurance on their double, almost triple-wide trailer in the Golden Rule senior mobile home park, where they moved in 2018. But that isn’t the case for everyone.
Many Californians are finding themselves stuck between a rock and a hard place, faced with the choice of either paying wildly higher premiums, looking into the state run FAIR plan, which is expensive and offers thin base coverage, or having to leave their homes and maybe even the state. For some, all three of these options are simply not in the budget. This is what one consumer advocate refers to as “economic victims of climate change.”
It’s a familiar story now: climate change and poor land management, including a lack of prescribed burns, have led to massive and dangerous wildfires in California. These blazes have tormented the state in recent years, burning down entire communities and forcing millions of residents to evacuate over the years.
As hotter, faster, larger, and more frequent wildfires make California a more dangerous place to live and own property in, homeowners, government agencies, and the insurance industry are all trying to figure out who should be responsible for the vastly increased risk of extremely destructive wildfires. No one wants to end up holding the bag.
To bide time until this problem is figured out, California Insurance Commissioner Ricardo Lara issued a freeze on non-renewals for 2.1 million properties inside or next to fire perimeters. This is the second year in a row Lara has issued a ban on non-renewals. But this is only a temporary solution. The moratorium ends on September 20, 2021. And at that point, the owners of those 2.1 million properties will be subject to the price hikes and non-renewals they were sheltered from this year. Included in those 2.1 million properties is Keller’s home.
Keller is a long time resident of Mendocino County. He has lived in and around Redwood Valley since the 1970s, but it was just two years ago that Keller moved to the Golden Rule Mobile Village, a mobile home park for seniors that lies in a valley off US Route 101, about half-way between Willits and Ukiah. He put an offer on the home the first day he saw it and, using a mortgage, purchased it for $100,000. That was about a year after the Redwood Fire burned within a quarter mile of the Village.
Keller felt a bit of sticker shock when he saw the amount he would be paying for home insurance then, around $1,000, but brushed it aside. Of course, that pales in comparison to what his insurance company raised it to this spring, around $4,000, which Keller said is more than what some of his friends with houses worth close to half a million dollars pay for their home insurance.
Because wildfires are getting worse, insurance companies are becoming more anxious about selling policies in wildfire prone regions, especially in rural areas. Losing access to private insurance makes homes more challenging to sell, and can devalue entire communities. Since climate change isn’t going away anytime soon, this problem isn’t going to solve itself, and, without systemic change, will likely get worse.
Keller’s home is painted light gray with white trim and shutters. The deck that Ed built is shaded with wooden latticework. “Outside you can tell it’s a manufactured home,” said Keller. “But inside you can’t, it has high vaulted ceilings and wood floors. It’s awesome.”
Keller loves his home, where he lives with his partner, Serena Williams. “It’s like being in a wildlife sanctuary,” he said. “In fact, this is a wildlife conservation area,” Keller said, pointing to a big, golden chaparral field spotted with a few ancient looking oaks. “So right in front here we have all these homes, but behind us there’s just a big grassy meadow, the creek, and then the hills.” Keller said he likes to sit in his backyard and watch the wildlife — turkeys, quail, and sometimes even coyotes.
The impacts of climate change have been closing in on Keller and many Mendocino County residents for years, with blazes like the 2017 Redwood Fire tearing through parts of the county with devastating results, and thick, suffocating smoke settling in the valleys for days at a time in the summer and fall.
Rising home insurance costs are just another way the realities of climate change are affecting people’s lives more directly and harshly than ever before.
Climate change, and a long history of poor land management and the increase of housing development in urban wild interface zones are worsening the devastating results of fires across the West. Infernos are burning hotter, growing faster, and have easier access to communities that have been heavily infringing on wildland for over 70 years. As a result of all this, flames are turning more land and property to ashes almost every year.
The home insurance industry has responded to this by raising rates on homes in areas deemed risky and pulling out of some zip codes and communities altogether to avoid incurring too much risk in a more uncertain world. This has made it more challenging for consumers to find good coverage at an affordable price.
Insurance companies declined to renew 235,250 home insurance policies in the state in 2020, up from 179,458 the year before, according to data from the California Department of Insurance, a consumer protection agency that regulates insurance in the state. Since 2015, there has been a 35% increase in FAIR plan policies statewide. This has stuck hundreds of thousands of homeowners with limited and pricey insurance options.
In response to this, homeowners must pay higher rates for private insurance, assuming they are either required to or want to have property insurance. Otherwise they have to look to California’s FAIR plan, the state insurance agency, which provides thin coverage at a high price for homeowners who can’t find anyone else to insure their home.
FAIR was created by the state in the 1960s to serve as a “last-resort” option for people who couldn’t find insurance in the private market. But in 2019, the number of FAIR plan policies the state sold increased by 36% statewide, from 140,138 to 190,196 policies. These numbers suggest that at least 50,058 households couldn’t find home insurance that worked for them in the private market.
When Keller found out his home insurance policy premium was about to skyrocket, he started to shop around for a more affordable policy. There’s no legal requirement to carry fire insurance if one owns a home or property. However, in most cases, there are other parties with a financial interest in the home, such as mortgage lenders, who require home insurance and can even specify how much coverage the mortgage borrower must acquire. Most mortgage lenders insist that borrowers buy enough coverage to take care of the expenses if the house is completely destroyed. This is the case for Keller.
Keller looked around for a few weeks, investigating and calling insurance companies. “There was no other insurance company that would take us on,” he said. He even looked at the FAIR plan, but found that when he added up the price of all the protections his mortgage lender required, that he would have to buy outside of FAIR, it ended up being more expensive than what he would pay sticking with his current company.
So, with no other choice but to move, and feeling grateful that he could afford the higher insurance premium, he signed on to his new $4,000 policy. “We just figured we would stick with this and then seeing as time goes on if we could find another company that’s more reasonable,” he said, sighing. “But we still haven’t been able to find one.”
Meanwhile, Keller worries about his neighbors who also got letters of non-renewal and saw their insurance premiums rise significantly. However, their situation is different than Kellers. They live on fixed incomes and can’t afford to stay, but also can’t afford to go. Keller said he doesn’t expect his insurance to go up again, since it is already so expensive. If it does, he said he could afford it but that “it better not.”
Why is this happening?
In the past decade, climate change and a history of fire suppression gave way to a new era of wildfire across the western US. In the 2015 fire season a total of 880,899 acres burned in California. The flames took seven lives and 3,159 structures with them. Since then, it’s gotten worse, except for in 2019, a brief respite. This year, 4,194,148 acres burned, almost five times the 2015 total and roughly the equivalent to two Mendocino Counties. Thirty-one people were killed and 10,488 structures destroyed. In September, the Los Angeles Times published an article titled “2020 California fires are the worst ever. Again.”
Throughout the last decade, the dawn of the age of megafires, the cost of wildfires moved from the millions to the billions of dollars. It was not a slow transition. In 2014, California wildfires cost around $20 million. The next year, the cost jumped to $3 billion.
How insurance companies are changing the game
As wildfire costs have grown in California, insurance companies have begun to seriously worry about the viability of their historically very safe industry, and rethink how to sell policies during the era of climate change without taking on too much risk.
In the past, insurance companies have relied on the fact that disasters were relatively rare. But climate change has changed that reality. It’s not just wildfires that have increased in frequency and ferocity. Natural disasters of all kinds are becoming more common and costing more by the year.
Insurance companies don’t keep huge sums of money in a vault ready to hand out when disaster hits.
They rely on the increasingly incorrect idea that large natural disasters are infrequent, assuming that they won’t be dolling out big chunks of money very often. As well, they depend on backing from reinsurance companies, which sell insurance to insurance companies. Reinsurance companies serve as a safety net for when disasters do hit and wind up being costly.
Now, with disasters becoming more common, reinsurance companies are getting correspondingly more nervous about insuring companies that sell policies in disaster prone areas. In turn, reinsurance companies are charging the consumer insurance companies higher premiums of their own. All of this puts more financial pressure on insurance companies, raising the risk of bankruptcy and even systemic shocks.
There are three options insurance companies are looking into to handle this issue.
Option one is to jack up policy prices, leaving them with more money in their pockets for when damages do occur. The second option is to skimp on coverage, so that they have to pay out less when damages do occur. Third, they can simply underwrite fewer policies in high risk areas, leaving those homeowners marooned. Insurance companies are using a mixture of all of these tactics to avoid paying more in damages than they receive in policy payments and protect themselves from insolvency.
In the past, wildfire has been considered a secondary “peril” by insurance companies — the industry term for a hazard that does not result in severe losses for insurance companies. Other hazards defined by the insurance industry as secondary perils have included hailstorms, tornadoes, landslides, and drought. But climate change has made wildfires, and other former secondary perils, more extreme, and they are now causing more damage across the board and costing insurance companies more in losses.
“Changes insurers made to protect themselves are harming consumers,” explained Amy Bach in an interview. Bach, the executive director of United Policyholders, a nonprofit that advises consumers on how to navigate the insurance market and advocates for fair and affordable insurance, noted that, “What we’ve got in California is economic victims of climate change. In California there are areas where home insurance has gotten very expensive and harder to find, those are economic victims of climate change.”
Bach explained that as insurance companies make market based decisions, the risk of wildfires is shifting away from private companies and onto property owners and government programs, such as FAIR, and therefore, to taxpayers. “What is interesting is that the FAIR plan means taxpayers are paying for people to live in fire prone areas. But we don’t want people to be pushed out of their homes, pushed into debt because you know they can’t fix their roof,” Bach said. ”People don’t use the word crisis,” she continued. “I don’t need to use that word, but for a household whose home insurance has been 800 dollars a year and they’re on a fixed income, now staring down the barrel of a $3000 annual increase in insurance price tag, what’s that?”
But Janet Ruiz, the director of strategic communication at the insurance industry group Insurance Information Institute, maintains that insurance companies have to make these changes in order to protect their bottom line and that rates have to reflect the reality of increasing and more destructive wildfires.
“Sometimes it’s easier to look at another state,” Ruiz said. “We’re seeing a lot of hurricanes going through the gulf states. They are experiencing more and more hurricanes due to the change in climate. When you look at that and say, ‘wow and next year is going to be the same’ you want to be able to reflect that in your rates.”
Between 2017 and 2020, there was a total of $1.29 billion in insurance rate increases across California.
In California, many insurance companies are choosing not to renew some or all of the policies they have in an area that they believe is in imminent danger of wildfire. Between 2018 and 2019, there was a 31% increase in non-renewals in the state, and a notable 61% of non-renewals in zip codes with high to moderate fire risk.
Keller got his notice of non-renewal this spring, about six weeks before his policy was set to expire.
But there wasn’t a lot of transparency in the process. Keller called to find out exactly why his policy went up, but didn’t get a very satisfying response. “I asked them, is this senior parks? Is this mobile home parks? Is it homes in general? They were not really committal about it all — it was like ‘yeah, it was because the fires and stuff, all rates are going up’,” he said. “But I know people with $400,000, $500,000 homes that don’t have insurance policies as expensive as mine.”
Keller can afford to pay for this insurance increase. Both he and his partner still work, Keller managing three small properties he owns in the county and Williams as a counselor at a local clinic. They’ve been able to amass enough savings to handle financial hits like this. But for many, that’s not the case. The numbers of FAIR plan increases show that exactly 50,058 people couldn’t afford insurance hikes and had to switch to the state plan between 2019 and 2020, essentially passing the costs on to taxpayers.
The insurance market in California is headed towards crisis. If too many homes burn down, and insurance companies have to pay too many policies out at once, the companies will face bankruptcy. But if insurance companies continue to raise insurance rates and pull out of communities, homeowners will be stuck with unaffordable policies and subsequently devalued homes, or have to move to the FAIR plan. California Insurance Commissioner Ricardo Lara made a big move early in November to try to avoid the latter issue, issuing a one year moratorium prohibiting insurance companies from not renewing home insurance policies for 2.1 million homeowners living within or adjacent to wildfire disaster zones. However, insurance companies can increase rates for those same homeowners that live in areas in or near this year’s wildfires.
Although this may offer a bit of breathing room to California homeowners who live in and near areas that were impacted by fire in 2020, it is not a long term solution to figuring out how affordable insurance will be offered to people in a way that won’t lead to the collapse of the insurance industry or an overburden on the state and taxpayers.
It’s a complicated problem because there isn’t a clear person to point a finger at and blame for this. Neither the homeowners, nor the state, nor the insurance companies. Like many issues that have to do with climate change, the problem has gotten so large and has so many layers, all the parties will have to do a lot of digging to figure out how to solve it.
“At some level, insurers are overreacting,” said Bach, executive director at United Policyholders. “Their reaction is out of proportion. But, to a certain degree, people can’t just point the finger at somebody else and say, ‘well I’m a victim of climate change and somebody has to do something about it.’ People who have made that choice to live in a heavily forested area, in some way have to bear the consequence of that decision…You’re gonna get more and more people asking the question,” ‘Should I stay here?’