Climate change and insurance: The alarm bell we can't afford to ignore

I've been trying to highlight this issue in conversations around fire risk. Its easy to want to throw the big bad evil insurance companies under the bus, because they are, well, big, bad, and evil. Sure. But what they are not is bad at math. They (along with reinsurance) have very carefully calculated their risk exposure in places like the California west, and determined that at the current prices they can not make a buck. Hate them all you want, sure. But recognize them for what they are and try and understand why they are choosing to not 'make money' in some situations.

Couple this with something like the California FAIR plan. This is the insurer of last resort in California. A kind of quasi private insurance company whose losses are subsidized like by the regulated marketplace. California recently passed a law requiring insurers give discounts for mitigation. However, if you read through and do the background research on the mitigations, few of them are backed up by any kind of reproducible study to determine if they are effective at reducing risk. The FAIR plan is the worst of these. Their standards show almost no indication that the mitigation actions will reduce risk (with some exceptions like the 0-5 foot zone management). The discounts are expected to come in at between 10-15%. So now you have even more burden from the riskiest of carries being pushed onto the regulated market place by the FAIR plan (depending on how many people take up the subsidy, which I think will be many). Couple this with the fact that the FAIR plan has put on 150k new policies in the last few years (I think they are currently standing at about 350k insured).

This is why State Farm pulled out. This is why Geico isn't writing new policies. Its a bad bet that you are almost certain to lose money on and insurance companies arent in the business of making bad bets.

I've heard industry insider speculation that at around 500k on the FAIR plan, the whole system goes tits up. My guess is that its actually around 420-440k. When this happens all the major insurers and reinsursers will pull out because the risk is just too high.

Any mortgage that requires PMI will go belly up. Property values will plummet. Cats will be sleeping with dogs. Bedlam I tell you.

What home owners don't want to hear though is that this is about how you manage your risk. Wildfire risk can be mitigated but it requires individuals to take meaningful action to reduce their risk. Whole communities have to act in concert to change their behavior.