Insurance Companies Will Try to Exploit the L.A. Fires. We Can’t Let Them
Mother Nature exploded in Los Angeles this month with the most damaging wildfires in the city’s, and likely the nation’s, history. We still don’t know the full extent of the devastation that is already massive with impacts felt across the city.
When the fires subside, families in the Pacific Palisades, Altadena, and all the impacted Angeleno communities face a long road to recover and rebuild. The challenges of this recovery will be made worse by the mass non-renewals by insurance companies that have left many homeowners uninsured, underinsured, or stuck in the FAIR Plan, California’s high-cost, low-benefit state insurer of last resort. Homeowners who paid into policies with the same insurer for decades are justifiably angry about their abrupt abandonment by home insurance companies. Even those with full, traditional coverage face an arduous claims process to receive full benefits from an industry known for low-balling policyholders.
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Insurance companies blame more destructive weather events for the pullouts and non-renewals and complain that California consumer protection laws prevent them from charging enough money to operate. They say they just want to account for climate change in rates. Yet those assertions feel hollow for homeowners whose own, often extensive, mitigation spending is routinely ignored by insurance companies.
Insurance companies’ real beef is a requirement they show their math before raising premiums, and a ban on profiteering that prevents them from price-gouging homeowners.
Regulation in California has kept rates down for homeowners while earning the insurance industry a healthy profit.
This is true even in the wake of recent pressures in the form of skyrocketing construction costs, stock market volatility, and worsening weather driven by climate change.
Here’s what we learned when we dug beneath the surface of the insurance industry’s claims.
Home insurers have done better in California over the past two decades than they have nationwide, including the big losses from the 2017 and 2018 conflagrations.
California home insurance companies’ return on net worth — a profit measure that takes into account premiums collected, claims paid, and investment income — was three percentage points higher than the national average over the last 20 years. The last five years were even better.
Also missing from the industry’s talking points: They were repaid billions by the investor-owned utilities whose equipment caused several of those 2017 and 2018 blazes, including over $11 billion by Pacific Gas & Electric alone.
News reports now suggest that Southern California Edison’s equipment may have started at least two of the L.A. fires. If proven, insurance companies will be in line for billions more in repayments.
There’s no question that insurance companies face real cost pressures. It started with the Covid-19 pandemic, which spurred supply chain problems that raised rebuilding costs. Then Wall Street went haywire — a blow for the insurance industry, which makes most of its money from investing its surplus and reserves.
Next came inflation, which increased material and labor costs, again driving up the price to rebuild. Add the escalation in climate change-driven weather events and the insurance industry is paying out more in claims than they’re used to.
None of this is unique to California, as homeowners paying higher prices and facing non-renewals from Colorado to Louisiana, and Iowa to New Jersey, can attest.
However, California homeowners are paying higher rates to reflect insurance companies’ legitimate cost increases. Nine of the top 10 home insurance companies in the state have received double-digit rate hikes, sometimes repeatedly, over the last two years. Farmers alone got four rate increases amounting to an average 44 percent in the space of a year and a half. Homeowners in fire areas saw much larger rate hikes.
Yet insurance companies are still restricting coverage. What’s going on?
The insurance industry isn’t letting a good crisis go to waste. These companies are exploiting real cost increases and the pressures of climate change to push deregulation they’ve wanted for decades.
The industry’s biggest target is California’s system of insurance oversight known as Proposition 103. The insurance reform law, written by Consumer Watchdog’s founder, was passed by voters in a 1998 ballot initiative in response to an auto insurance availability and affordability crisis.
Prop 103’s premise is simple: Transparency will ensure fair pricing. The law required insurers to open their books and justify prices, and get the insurance commissioner’s approval before rate increases take effect.
The Consumer Federation of America called it a model for state insurance regulation that has saved consumers billions of dollars since it was enacted — $154 billion on auto insurance alone. Consumer Watchdog’s challenges to excessive rates have saved homeowners, renters, condo owners, small business owners, and drivers over $6.5 billion in the last two decades.
The insurance industry wants to roll back that law and California Insurance Commissioner Ricardo Lara has become their champion.
When several large insurance companies announced they would pause new sales in California in early 2023, it was the opening salvo in a concerted insurance industry campaign to eliminate consumer protection laws. Late in 2023, Consumer Watchdog obtained emails showing that the insurance commissioner drafted a deregulation bill with the insurance industry at the end of the legislative session. When lawmakers refused to take up the legislation, Commissioner Lara announced he would do it by regulation instead.
Lara’s plan enacts an insurance industry wishlist to reduce scrutiny of rates, make homeowners across the state bail out insurers for potential billions in FAIR Plan losses, and charge consumers for the cost of insurance that insurers buy in the global, unregulated reinsurance market.
The centerpiece of his new rules gives insurance companies the ability to use black-box algorithms to increase rates based on undisclosed and untested climate predictions.
But other states’ experience shows that giving the insurance industry everything it wants isn’t going to keep Californians insured or solve the climate crisis. Florida laws already allow everything the insurance industry just won from Lara in California. Yet Florida homeowners’ rates are more than 2.5 times what they are in California, their insurer of last resort has four times the market share of California’s FAIR Plan, and insurers still have left the market in droves.
Insurance Commissioner Lara says that in return for this deregulation, insurance companies will have to cover 85 percent of people living in fire areas again. However the text of his rule both fails to require more sales and lacks any penalty for insurers who don’t expand coverage in the state.
Commissioner Lara admitted this in December when he acknowledged that no insurance company would have to increase coverage more than five percent every two years. For an insurer that already dropped most of its homeowners in fire areas, we’re looking at more than 30 years to reach 85 percent coverage.
Homeowners need a different approach.
Insurance companies should use climate science to predict future risk, but that technology must be open so climate predictions cannot be gamed. California can lead the nation by building a public wildfire catastrophe model so regulators and residents can trust that cost predictions are reliable and spread fairly. This will make the climate impact on insurance rates transparent and give consumers and communities direct access to information about their own fire risk and what they can do to protect themselves.
Even as they drop policies and demand higher rates due to climate change, insurance companies refuse to acknowledge when homeowners take proven steps to protect their homes from wildfire. It’s time for the insurance industry to invest in wildfire resilience and guarantee coverage to those who meet state standards for wildfire-resistant home building, and clear flammable materials from around their homes.
This will keep Californians covered in the short term and make the state more resilient by reducing all of our risk over time.
There’s plenty of precedent for such a mandate. In California, auto insurance companies must sell to every good driver. Nationwide, Obamacare barred health insurance companies from cherry-picking only the healthiest patients, ending a longstanding practice of denying those with preexisting conditions.
At the same time, insurance companies have gotten a pass for their own complicity in climate change. California insurers hold over $500 billion in fossil fuel investments, and providing insurance to fossil fuel infrastructure and extraction earns global companies more than $20 billion annually. It’s time for insurance companies to get out of the fossil fuel business and stop driving climate change.
Then there’s the reinsurance industry — the companies insuring the insurers — which may well use the current fires, or any other global weather event, as an excuse to again hike premiums and extract big profits from the insurance industry. Reinsurance companies’ industry-wide return on equity was a record 22 percent in 2023 and close to 20 percent last year.
A national reinsurance program to free the insurance industry from those companies’ price-gouging is the carrot that can make mandatory insurance sales workable in the long term. A federal proposal last year by then-Rep. Adam Schiff (D-Calif.) would have allowed insurance companies to buy reinsurance from the federal government.
This is a nonpartisan idea that will benefit Florida as much as California. But in return for protection against another worst-case weather scenario, insurers would have to sell comprehensive coverage and invest in community disaster resilience. A nonprofit government reinsurance program can backstop insurers as we move towards building more sustainable communities.
Ultimately, there are some places where it will be unsafe to continue rebuilding. That means incentivizing smarter development and investments in communities to reduce risk from wildfires and other weather disasters. It means making hard decisions to shift housing away from those areas that are at the highest risk from climate change. And it means protecting access to insurance where people live today until plans can be enacted for home buyouts, relocation, and other solutions to ensure the transition to safer communities is equitable.
It should not be up to the insurance industry — which is making pullout and pricing decisions with short-term profit, not long-term sustainability — in mind, to make those calls. Communities and our chosen representatives must reclaim the power to decide where Californians and all Americans can and cannot live.
Carmen Balber is the executive director of Los Angeles-based nonprofit Consumer Watchdog.
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