Image for article titled The Los Angeles fires and our 'uninsurable future' — Image: ETIENNE LAURENT / AFP (Getty Images)

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Two weeks of raging fires, driven by winds of more than 100 miles per hour, have created a dystopian hellscape in drought-stricken northern Los Angeles — burning hundreds of thousands of acres, devouring more than 12,000 structures, and leaving at least two dozen people dead. Embers whooshed across the landscape, igniting trees, hedges and the roofs, decks, and sidings of wooden houses that had been built to survive earthquakes, but never a fire of these proportions.

Hundreds of small businesses have been vaporized, and thousands of people have been forced to flee from the potential path of the fires. While weather forecasters say there won’t be significant rainfall until next month, one thing we know now: While the physical damage will be calculated in tens of billions of dollars and the economic damage in the hundreds of billions, only a fraction of that is covered by insurance. Yet even that fraction is expected to force massive changes on the insurance market, in California and across the U.S., and change the face of Los Angeles.

A new estimate on Thursday put the total insured losses from the L.A. fires between $35 and $45 billion, according to CoreLogic, a risk modeling and catastrophe data company. The company said the estimate includes fire and smoke damage, the expected surge in the price of labor and building supplies, and debris removal, clean up, and payments for temporary housing.

“Many of the potentially impacted properties are high-value homes, so even moderate damage from the fires or smoke could result in costly claims,” said CoreLogic senior director Tom Larsen.

Those losses will push up premiums in California and most likely across the U.S., with potentially devastating effects as wildfires, hurricanes, floods and other extreme weather events occur with greater frequency and greater intensity due to global warming.

“We’re marching toward an uninsurable future in this country and across the globe,” said Dave Jones, who served as California’s insurance commissioner from 2011 to 2018 and now directs the Climate Risk Initiative at the University of California, Berkeley. Jones said that even as regulators roll back tight rules on insurers and let them pass on the cost of reinsurance and other expenses, the problem persists.

“We’re not going to deregulate our way out of the problem, and we’re not going to rate increase our way out of the problem,” Jones said.

In Florida, state regulators acceded to all the deregulation demands of the insurance industry, and still, insurers have been moving out of the state as damage from hurricanes and coastal flooding rise.

“It’s going to be nearly impossible to profitably write insurance in the state of California,” said Jeff Clinkscales, senior vice president at Risk Strategies, an insurance broker and adviser. “It’s pretty easy to predict that those carriers that will offer any of the capacity that they’re willing to give to California, that the pricing is going to be, frankly, outrageous.”

The result, Clinkscales said, is going to be many more property owners opting out of insurance altogether because they simply can’t afford it.

“From an economic perspective, the burden of wildfires lies in the way that so much economic activity must be directed toward replacing lost wealth — rebuilding homes, businesses, and infrastructure — instead of creating new wealth that could drive growth and innovation,” said Oak McCoy, an economics professor at University of New England College of Business. California, he noted, accounts for almost 15% of the U.S. GDP, meaning the economic toll of California’s fires reverberates nationally.

What to do?

Zesty AI, an insurance data startup, uses AI to model risk home-by-home rather than by zip code. Co-founder Kumar Dhuvur said the company uses 14 to 16 data points, including nearby vegetation and construction materials, rather than the three or four data points now commonly used by insurers, to determine the ability of a home to survive a disaster. He compared it to a FICO score for a home.

Not only does that let insurers accurately price the risk for individual homes, meaning more homes can get affordable insurance policies, but it’s also meant to encourage fire prevention work — cutting down volatile shrubs, replacing a fire-prone asphalt roof, or clearing a yard to create a firebreak.

“Based on the analysis we have done for other fires, our property score has been pretty accurate,” Dhuvur said.

Another possibility is what the industry calls captive insurance. That’s when larger property owners such as industrial firms, commercial landlords, or even larger homeowner associations band together to insure themselves. With proper technical assistance and the aim of protecting themselves rather than making a profit, captive insurers can often price risk more accurately than commercial insurers. But even then, a major catastrophe like the L.A.fires could wipe out a captive company.

And it’s not just California that will see insurance rates rise. “The California situation is not healthy,” said Franklin Manchester, a longtime insurance executive who now advises insurance companies for a data analysis firm called SAS. “I expect everyone’s insurance premiums to go up in the following year, and no one will cite California as the proximate cause.”

Not FAIR

Like almost three dozen other states across the U.S., California has a state-chartered insurer of last resort called the FAIR (a twisted acronym for Fair Access to Insurance Requirements) Plan, a private association whose day-to-day operations are controlled by insurance companies, not taxpayers. According to Moody’s, as of Sept. 30 the FAIR Plan’s exposure in Los Angeles County was $112.2 billion, up 53% from the year before. According to the trade publication Insurance Journal, FAIR has only $700 million in cash to pay claims, below the $900 million deductible it has to pay out before it can access another $2.5 billion in reinsurance.

Fortunately, it’s not California taxpayers who will foot the bill, it’s the commercial insurers. But Jones, the former California insurance commissioner, said they can lay off a good portion of that assessment on policyholders across the state. The people who can afford to rebuild or who could afford insurance in the first place will stay.

“Los Angeles will come back a probably whiter, wealthier city after this,” said Daniel Aldrich, director of the Resiliences Studies Program at Northeastern University, who lived through Hurricane Katrina and its aftermath in New Orleans. “Because, at the end of the day, this disaster, like most other disasters, impacts the vulnerable most.”

— Peter S. Green, Contributing Editor

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The Los Angeles fires and our 'uninsurable future'