California’s Wildfire Crisis Is Roiling Its Insurance Market

By Katherine Chiglinsky, Prashant Gopal and Noah Buhayar | November 26, 2019

Lauris Bye, a homebuilding industry veteran who moved to Southern California’s wildfire-prone hills decades ago, felt confident about the newly built house he was buying about 30 miles north of downtown Los Angeles.

It had safety features tucked into the construction — from ember-proof vents to green buffers with sprinklers to fend off flames. But a few days before closing, he hit a snag. State Farm informed him it wouldn’t write an insurance policy for the $839,000 Toll Brothers home on a hillside in Santa Clarita

without studying the fire risk more closely. The extra time would have complicated the purchase.

“I had been with State Farm for like 20 years and never had a problem,” he said.

As the insurance industry reckons with climate change, fires in California have grown more deadly and destructive. Insurers are reconsidering how much risk they’re willing to take and pulling back from wild lands. While Bye, 52, was eventually able to find another carrier and close his purchase, customers are facing premium hikes and dropped coverage that are hampering real estate deals in a state already plagued by an affordability crisis.

State Farm said it doesn’t comment on individual customers and wouldn’t provide details on its underwriting guidelines in California.

“A fundamental and core function of any insurance company is the selection and ongoing evaluation of risk,” State Farm said in a statement. “While wildfire is a significant risk, it is not the only factor considered in our underwriting of homes in California.”

Allstate Corp. has reduced its presence in California in recent years, arguing it needs to be able to charge more in riskier areas. Other companies, including Travelers Cos., have petitioned state regulators to hike rates. Homeowners, as a result, are seeing prices rise, sometimes dramatically, for properties they’ve lived at for years.

“When we look back over our experience over the last decade, there haven’t been many things that have surprised us other than the wildfires,” Travelers Chief Executive Officer Alan Schnitzer said at a conference in September. “The wildfires were a surprise and we’ve adjusted to that.”

As it faces the wildfire emergency, California is expanding its 51-year-old FAIR Plan. The insurer-backed program is meant to be a temporary option for stranded consumers but is getting more heavily used in communities prone to wildfires. The policies, which are bare bones and can be even more expensive than traditional insurance, almost tripled in 2018 from three years earlier in the 10 counties with the most homes at high risk of wildfire damage.

The California insurance regulator has ordered the FAIR Plan to cover claims of as much as $3 million compared with the current cap of $1.5 million starting next year. That comes after scores of expensive homes were burned in a fire that ravaged Malibu last year.

The insurance industry is trying to improve its analysis of the risks in areas prone to fire, said Chris Folkman, who works at Newark, California-based risk modeling firm RMS. The company has developed a model that uses satellite imagery to zero in on individual houses, allowing insurers to pinpoint risk.

“A ZIP code can be a very big geographic area where you have both safe neighborhoods and dangerous ones,” Folkman said. “When you paint with a broad brush, it doesn’t do anyone any favors.”

The use of wildfire risk scores for certain addresses has caused a bigger spread in insurance rates, according to Joel Laucher, a senior adviser at the California Department of Insurance. The state faces a tough challenge: It wants to keep prices affordable without causing insurers to leave the market.

For many homeowners, wildfire risk has been a part of living in California for a long time. They find it jarring to have insurers clamp down on them now, as they struggle to afford living in a region that’s gotten dramatically more expensive.

Bye said he moved to Santa Clarita, in part, because he needed more space to accommodate his elderly mother. The costs for her stay in an assisted-living facility were too high and getting a bigger house closer to Los Angeles wasn’t financially feasible, he said.

In late October, the Tick Fire billowed a massive plume of smoke above the hillside behind Bye’s house. At his previous home, in Sylmar, he’d been forced to leave three times because of blazes. But this go-around he decided to stay put, defying a mandatory evacuation order. The fire never reached his new house, but he said he was “packed and ready to go” just in case.

“All you can do is take steps to mitigate the damage and the risk,” Bye said. “But at some point, you’ve got to live where you’ve got to live.”

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