How Wildfires Destroyed California’s Insurance Market

The Los Angeles wildfires have killed at least 27 people, destroyed more than 17,000 structures, and displaced tens of thousands. In the next few months, the billions of costs in damage to homes and property will ripple through the state’s insurance market — and likely cause its insurer of last resort to run out of money.

Benjamin Keys has studied how natural disasters, rising sea levels, and increasing exposure to risk have driven up insurance costs nationwide. He is a professor of real estate and finance at the University of Pennsylvania’s Wharton School, and one of the country’s top experts on climate change, home values, and insurance markets.

On this week’s episode of Shift Key, Rob and Jesse talk with Keys about how California broke its insurance market, why insurance costs are rising nationwide, and how homeowners, home buyers, and communities can protect themselves. They dive into President Donald Trump’s dizzying first day of executive actions and how they’ll affect the future of energy development. Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap, and Jesse Jenkins, a professor of energy systems engineering at Princeton University.

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Here is an excerpt from our conversation:

Jesse Jenkins: We should have warned you ahead of time that this podcast always devolves back to the tri-state area. It’s just sort of inevitable. We saw this dynamic on the Jersey Shore after Hurricane Sandy, where a lot of more working class-type communities that had homes there, they ended up either getting wiped out or having to leave and sell, and moving out. And what replaced them were very large houses — some of them built in a more secure way, up above the floodplain on elevated floors. But most of them, as I understand it, don’t have insurance.

So they are self insured, in the sense that people think they’re wealthy enough that they can just absorb the loss. That’s one type of self insurance. The folks who are coming off the federal flood insurance plan are probably folks who are not really self insured. They can’t diversify there. They don’t have enough wealth to absorb that risk. They’re just simply exposed now and rolling the dice.

Benjamin Keys: And for the time being, the cost of flood insurance is still subsidized. And so, you know, even if you see your rate jump by 18% and you say, wow, that’s expensive, it’s going to get substantially worse. And so it’s a huge mistake to leave that path, and have interrupted flood coverage. That’s a tough one. And you know, most of the flood policies that are out there are mandatory. Those are ones that are being required by the mortgage market that, say, if you live in a flood zone, you have to have flood insurance.

So actually, I have flood insurance on my house in Philadelphia. I live close enough to the Schuylkill River, a couple of blocks away, that — and my neighborhood did flood just a few years ago. We fortunately weren’t harmed by it, but that flood insurance policy is mandated by the mortgage market. And so that’s where most of the coverage comes from.

But when you look at the voluntary take-up of flood insurance, it’s very low.

Jenkins: Are we likely to see something similar for wildfire risk? That effectively, insurers say, we'll continue to write policies in California, but if you're in a wildfire prone area, we're not going to give you wildfire insurance, which would create a kind of similar issue.

Keys: It's possible that we could see a national wildfire program or a broader national disaster program develop. The insurance industry would love to carve out these risks, right? These are very difficult things.

This episode of Shift Key is sponsored by …

Intersolar & Energy Storage North America is the premier U.S.-based conference and trade show focused on solar, energy storage, and EV charging infrastructure. To learn more, visit intersolar.us.

Music for Shift Key is by Adam Kromelow.