Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: In January, an insurance company called the Hartford announced that
Speaker 2: it would no longer issue any new homeowners insurance policies
Speaker 2: in California. Three other insurance companies, USAA, All State, and
Speaker 2: State Farm have stopped writing or severely limited new homeowners
Speaker 2: policies across the state. According to Bloomberg reporter Nadia Lopez,
Speaker 2: the breaking point for a lot of these insurance companies
Speaker 2: was the campfire back in twenty eighteen, and the video
Speaker 2: that we're looking at is unbelievable, I mean really staggering
Speaker 2: the veracity of the fire that we're seeing.
Speaker 3: It burnt down eighteen thousand buildings, cost sixteen point five
Speaker 3: billion in damage, killed eighty five people, left.
Speaker 1: A lot more missing.
Speaker 3: It made it the most expensive, catastrophic and lethal fire
Speaker 3: in the state's history.
Speaker 2: And insurance companies were on the hook for a lot
Speaker 2: of that damage.
Speaker 4: Was really a big financial blow and made everyone say, oh,
Speaker 4: my goodness, our model might not be working.
Speaker 2: This is Leslie Kaufman, a climate reporter for Bloomberg. Leslie
Speaker 2: and our colleague Nadia say that as private companies have
Speaker 2: pulled back, the state has stepped in to help people
Speaker 2: get the coverage they need through residual insurance plans sometimes
Speaker 2: called fare plans.
Speaker 3: It's a bare bones option that's usually far more expensive
Speaker 3: than a traditional policy, but it covers what a private
Speaker 3: insurer won't, like a wildfire.
Speaker 2: It's supposed to be a plan of last resort, but
Speaker 2: the number of people in these types of plans is growing.
Speaker 4: These were never meant to be big plans. These were
Speaker 4: meant to be teeny plans that served a tiny part
Speaker 4: of the marketplace. The problem is climate change is really
Speaker 4: changing that dynamic. It's made the much more common, much
Speaker 4: more mainstream, which means the risks are much greater.
Speaker 2: And with more people relying on this kind of insurance,
Speaker 2: questions are starting to emerge about whether these plans are
Speaker 2: prepared financially to handle a major catastrophe.
Speaker 4: The number of policies have absolutely grown by staggering amounts.
Speaker 4: The current liability in California is two hundred and ninety billion.
Speaker 4: That's about six times what it was only five years ago.
Speaker 2: Today. On the big take, why insurance has become so
Speaker 2: hard to get for some homeowners, and how skyrocketing enrollment
Speaker 2: and state created plans could create the conditions for a
Speaker 2: sweeping financial crisis. I'm Sarah Holder, and this is the
Speaker 2: big take from Bloomberg News. The campfire that tore through Paradise, California,
Speaker 2: in twenty eighteen was said to have been the costliest
Speaker 2: natural catastrophe of the year, with an estimated twelve point
Speaker 2: five billion dollars in insured losses. Now, typically when insurance
Speaker 2: companies have to pay out a bunch of money like this,
Speaker 2: they respond by raising rates. But this time in California,
Speaker 2: my call leagues Leslie Kaufman and Nadia Lopez say the
Speaker 2: insurance companies couldn't just do that.
Speaker 4: The campfire wiped out double the profits of twenty five years,
Speaker 4: so not just twenty five years of profits, twice that amount.
Speaker 4: So they went to California and said, we have all
Speaker 4: this risk and you have people in risky places. We
Speaker 4: want to raise rates now, and California said, no, can do.
Speaker 4: California has a proposition on the books that limits the
Speaker 4: amount of money you can raise.
Speaker 3: California right now has some of the most consumer friendly
Speaker 3: of regulations that keep rates low, and when an insurance
Speaker 3: company does want to raise their rates, they're subjected to
Speaker 3: approval from the Department.
Speaker 2: Of Insurance NADIA says that while the regulations have saved
Speaker 2: consumers one hundred and fifty billion dollars on premiums over
Speaker 2: the last twenty five years, the insurance industry argues that
Speaker 2: the caps have hurt them. They say they've made it
Speaker 2: harder to adapt to the growing risk of catastrophes brought
Speaker 2: on by climate change.
Speaker 3: They can only use historical data to set rates. They
Speaker 3: can't use forward looking climate data currently, which is something
Speaker 3: they've been advocating.
Speaker 1: For for a long time.
Speaker 3: So ultimately, they argue that the state's current rules don't
Speaker 3: allow them to increase premiums enough to reflect the risk
Speaker 3: that they keep taking on.
Speaker 2: And so a bunch of private companies have just decided
Speaker 2: to stop writing new policies entirely for Californians and certain
Speaker 2: high risk wildfire zones.
Speaker 3: There's currently about eleven million people who live in California's
Speaker 3: wildfire risk zones. These are areas that include Lla County,
Speaker 3: San Diego, the vineyards of Napa and Sonoma, this Sierra
Speaker 3: Nevada foothills. It's unclear exactly the total number of homes,
Speaker 3: but there are significant populations across the state.
Speaker 2: All of this has made the state created insurance plan
Speaker 2: increasingly popular.
Speaker 4: So people are pouring into these plans as private insurers
Speaker 4: pull out, they have nowhere else to go.
Speaker 2: So now this plan of last resort is bearing the
Speaker 2: risk that private insurers refuse to cover, which has raised
Speaker 2: a question is there enough money to cover all these
Speaker 2: new policies if another campfire were to happen. The plan
Speaker 2: doesn't make its finances public, but a state report estimates
Speaker 2: it's holding roughly one hundred million dollars in reserves as
Speaker 2: of twenty twenty one.
Speaker 3: That's less than one percent of the insured losses from
Speaker 3: the campfire.
Speaker 2: And this problem is bigger than just California because state
Speaker 2: created insurance plans exist in lots of other states. In total,
Speaker 2: thirty six states have these kinds of residual plans that
Speaker 2: offer natural disaster coverage. They all need to reckon with
Speaker 2: the same existential challenge.
Speaker 3: As states have assumed more and more risk, they're dodging
Speaker 3: a fundamental question, how can they cover claims in the
Speaker 3: wake of a huge and major catastrophe.
Speaker 4: So this is the really tricky part. They do get premiums,
Speaker 4: but they are not forced like a private and sure
Speaker 4: to do the kind of stress testing to make sure
Speaker 4: that they have enough reserves and reinsurance to pay their
Speaker 4: all their claims. I think how they're going to pay
Speaker 4: should there really be a decimating event, a really big
Speaker 4: catastrophic event is too unclear in too many of the cases.
Speaker 2: After the break, what homeowners and state policymakers are doing
Speaker 2: to prepare for the worst. Welcome back to the Big
Speaker 2: Take from Bloomberg News. I'm Sarah Holder. Before the break,
Speaker 2: we were talking about state created insurance plans and the
Speaker 2: question of whether they'll be able to cover a bunch
Speaker 2: of claims in the event of a major catastrophe. We
Speaker 2: asked Nadia to walk us through a scenario. There's a
Speaker 2: huge wildfire in an area of California where a lot
Speaker 2: of Fair Plan policyholders live. How would the plan pay
Speaker 2: their claims?
Speaker 3: The Fair Plan has a certain number of reserves, and
Speaker 3: if they don't have enough money to cover all of
Speaker 3: the claims from that event in that area, then legally
Speaker 3: they would place an assessment on all of its members.
Speaker 1: And all of its members are those private insures.
Speaker 2: Yes, private insurers are the members of the state created plan,
Speaker 2: and some of these members are the very same companies
Speaker 2: that have said they no longer want to write new homeowners'
Speaker 2: policies in the state.
Speaker 3: So those private insurers would still be on the hook
Speaker 3: for paying out those claims in areas that they'd said
Speaker 3: they didn't want to cover anymore. That's why they're pulling
Speaker 3: out right. If they have to participate in the fair
Speaker 3: Plan proportional to their market share, they're going to reduce
Speaker 3: their market share in that state. That's what makes sense
Speaker 3: to them, so that the risk they take on through
Speaker 3: the fair Plan becomes lower. But then it's like a
Speaker 3: it's like a horrendous cycle.
Speaker 1: It's only creating more problems.
Speaker 3: Wait, this is crazy, Yes, it is. This is why
Speaker 3: we wrote this story because it is.
Speaker 2: It is a very a vicious cycle.
Speaker 1: Vicious cycle.
Speaker 3: Yes, the more that private insures retreat, the bigger the
Speaker 3: fair plan grows.
Speaker 1: So that presents more risk to the.
Speaker 3: Private insures that are attempting to.
Speaker 1: Reduce their risk by retreating. But then more people are
Speaker 1: left without options.
Speaker 3: So this is all happening at a really fast rate,
Speaker 3: and inevitably there will be another wildfire or natural disaster,
Speaker 3: and so if a catastrophic event triggers its massive assessment,
Speaker 3: it could force a lot of private insurers and bankruptcy.
Speaker 3: What would happen otherwise? Would the state step in and
Speaker 3: say no, in order for them to recoup some of
Speaker 3: those losses, We'll allow them to put a surcharge on
Speaker 3: all their policyholders. It's unclear. That's what we don't have
Speaker 3: the answer to yet. But inevitably there will be a
Speaker 3: wildfire at some point because climate change is not slowing down.
Speaker 3: So how is the state going to account for this possibility?
Speaker 2: Yeah, I mean, how is the state going to account
Speaker 2: for this possibility?
Speaker 1: Right now?
Speaker 3: As the private insurance are retreating. Ricardo Lara, the California
Speaker 3: Insurance Commissioner, has put forth a plan that he's calling
Speaker 3: the largest insurance reform in the state since proposition. Want
Speaker 3: to throw his pass back in the eighties, which set
Speaker 3: those friendly consumer regulations right, So his plan would drastically
Speaker 3: change the way the rules currently work. It would allow
Speaker 3: insurance to raise rates more quickly and to allow for
Speaker 3: increases based on future climate risk data and reinsurance costs.
Speaker 3: And these are big changes that the prevad insurers have
Speaker 3: been saying they really wanted for a long time, and
Speaker 3: that he says will now contribute to stabilizing the market
Speaker 3: and bringing them back to do business in California. The
Speaker 3: concern is that this change could lead to rate hikes
Speaker 3: of as much as fifty percent. That's what some sources
Speaker 3: had told me, and that could create a real burden
Speaker 3: on Californians who live in areas that are already really
Speaker 3: difficult for them to be living in due to the
Speaker 3: cost of living, expenses and other things.
Speaker 2: As for the state's fair plan, the California Department of
Speaker 2: Insurance set in a statement that it performs a triennial
Speaker 2: examination to quote evaluate the financial condition, assess corporate governance,
Speaker 2: identify current and prospective risks, and evaluate system controls and
Speaker 2: procedures used to mitigate those risks end quote. Of course,
Speaker 2: California's is not the only state mandated plan facing this risk.
Speaker 2: Of the thirty six states with these residual insurance plans,
Speaker 2: twenty one declined to explain how exactly they pay deficits
Speaker 2: that exceed their assets. That's according to new research from Milliman,
Speaker 2: an insurance consulting group. Leslie and Nadia say that when
Speaker 2: insurers talk about how to address the concern presented by
Speaker 2: climate change, there's one thing that comes up again and again.
Speaker 2: It's known as hardening.
Speaker 4: This is becoming a theme with insurance companies, how they
Speaker 4: could become your partner in hardening and what does that
Speaker 4: look like. That means that if you're in a flood zone,
Speaker 4: you need to go up on stilts or make sure
Speaker 4: that your sumpump is powered so that it wouldn't go
Speaker 4: out during a flood. If you're in a fire zone,
Speaker 4: you have to have a five foot protection around your
Speaker 4: house with nothing combustible, and that includes plants and shrubs.
Speaker 4: So their answer is, if we're going to do all
Speaker 4: of this and make affordable and you're going to continue
Speaker 4: to live in California forests and Florida coastal areas, we
Speaker 4: have to come up with a plan B to make
Speaker 4: this a little bit better.
Speaker 2: But strategies like hardening only go so far as the
Speaker 2: risks of major storms and fires increase, which raises a
Speaker 2: question is moving away from these disaster prone areas something
Speaker 2: people should be considering.
Speaker 3: I think that a lot of people are not left
Speaker 3: with many options. Tons of people. Most people live in
Speaker 3: parts of the state that aren't necessarily exposed to wildfires,
Speaker 3: in the San Francisco Bay area or other parts of
Speaker 3: the coast, but Increasingly more people are being exposed to
Speaker 3: wildfire risk all over.
Speaker 1: These are their communities.
Speaker 3: Some people chose to live in these places because they
Speaker 3: can't afford the high cost of living in a city
Speaker 3: like Sanforce, Cisco or La, and some people have deep
Speaker 3: communal ties.
Speaker 1: To these areas.
Speaker 3: It's a really tricky problem because even though there are
Speaker 3: some places of California that some people say we shouldn't
Speaker 3: be building in anymore, you can't really tell people that
Speaker 3: they should leave the communities that they loved and have
Speaker 3: lived in for generations.
Speaker 2: This is the Big Take from Bloomberg News. I'm Sarah Holder.
Speaker 2: This episode was produced by Adrianna Tapia. It was edited
Speaker 2: by Caitlin Kenny and Emily Buzo. It was mixed by
Speaker 2: Ben O'Brien. It was fact checked by Alex Sugiura. Our
Speaker 2: senior producers are Naomi Shaven and Jilda Di Carly. We
Speaker 2: get editorial direction from Elizabeth Ponso. Nicole Beemsterbor is our
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