"Insurance is the climate change canary"
And the canary is dying, says California's former insurance commissioner, Dave Jones.
Earlier this month, the California FAIR Plan—the state’s fire insurance of last resort—requested a $1 billion bailout in the aftermath of LA’s devastating fires.
What is the California FAIR Plan and why does it exist? Why doesn’t it have enough money, and who is picking up the $1 billion tab? And what is the broader insurance landscape in the United States looking like?
To answer these burning questions, I chatted with Dave Jones, the former Insurance Commissioner of California, who serves as Director of the Climate Risk Initiative at UC Berkeley’s Center for Law, Energy and the Environment (CLEE).
Rising risks
“Insurance companies respond to increased losses from climate change-driven events in two ways. One is they raise price, and the second is they stop renewing and stop writing new insurance,” explains Jones.
In California, as insurance companies have decided that increasing numbers of homes and businesses face too much risk from wildfire, both of these responses have been happening with greater intensity in recent years.
Last year, seven of 12 insurance companies last year stopped writing new insurance. So, although they were renewing most of their existing customers, if you were moving house, they wouldn't write you insurance for your new home—even if you’d had insurance at your previous place.
Jones underscores that (contrary to some inaccurate reporting), none of the major carriers have abandoned the state’s insurance market1—and that they have been typically renewing 80% or 85% of their existing policyholders. But while insurance companies have been making underwriting profits in the years from 2019 to 2023, he says, “The background risk of climate change-driven wildfires has continued to grow, and it's outpacing their ability to price their way out of this challenge.”
Furthermore, the insurance companies recently asked for—and got—a number of regulatory changes, including the ability to hike insurance premiums faster. They also asked that the rules be changed so that if the California FAIR Plan were to run out of money, they would no longer be on the hook to cover any shortfalls in funding.
That’s FAIR?
Let’s back up a bit and explore what the FAIR Plan is exactly. California is one of some 35 states which have “residual markets” for insurance—also known as “FAIR plans”. These are insurers of last resort that the state has set up by statute to cover risks that private insurers are refusing to cover because of worsening climate impacts. FAIR Plans are not state agencies and aren’t taxpayer funded—“they are state statutorily created, involuntary private associations of insurance companies,” explains Jones.
The FAIR Plan model is something of a compromise. The state, Jones says, is effectively saying to insurance companies, “You get to decide who to write insurance for […] but you're going to be required to participate in a residual market or FAIR plan, and that entity is going to write insurance for the risks that you won't write”—so that those denied coverage still have somewhere to go to get insurance.
Because the FAIR Plan is not a conventional insurance company, it isn’t required by the state to have the same high level of reserve requirements that a private insurer must2. Jones says that this is because if the FAIR Plan was mandated to have the same level of reserves as an insurance company, nobody would be able to afford getting insurance from it. The FAIR plan, he says is “already expensive3 because it's covering the riskiest risks, but then if it's required to set premiums sufficient to have big reserves, it's unaffordable.”
Skin in the game
Jones says that, instead of high reserves, most states have historically expected private insurers “to have skin in the game”—after all, they’re the ones deciding to refuse people coverage. In other words, if a FAIR plan runs out of money and needs more cash to pay out to policyholders, private insurers were on the hook to cover the shortfall, with contributions based on their relative market share.
Lobbying from California’s insurance industry saw an attempt at changing the rules, whereby if the California Fair Plan were to run out of money, then the bill would go to all policyholders in California—not just FAIR Plan policyholders, but anyone with home insurance in the state.
While a legislative attempt to make this change in 2023 was thwarted, the insurance companies got pretty much what they wanted when they subsequently convinced Ricardo Lara, the current insurance commissioner4 to issue an order which makes them liable for just $500 million if the FAIR Plan were to run out of funds and needed an infusion of more money. Anything in excess of that will have to now be covered by California’s policyholders.
Bailout = a bigger bill for you
This rule change came at an auspicious time—if you’re one of the state’s private insurers rather than policyholders, that is! Earlier this month, in the aftermath of the LA fires, the California FAIR Plan requested (and was granted) a bailout of $1 billion5—funding that it believes will ensure it is able to pay out claims through to June6.
The insurers themselves are only on the hook for half of that amount, with the rest being charged (as a surcharge) to California’s home insurance policyholders. Had the bailout happened a year ago, before the rule change, California’s policyholders—already struggling with spiraling living costs—would not have been stuck with this $500 million bill.
The bigger picture
Jones notes that when he stepped down from the office of Insurance Commissioner in 2018, the California FAIR Plan had about 180,000 policyholders. In the intervening years this has surged to over 450,000. The reason the FAIR Plan has so many more policyholders is because the private insurers have decided to non-renew so many households.
Why the non-renewals?
“Because the insurers have decided that they can't cover these risks. And why has that happened? Because we're not doing enough fast enough to address climate change,” says Jones.
Jones notes that, in recent years, there have been more and more extreme examples of California’s main climate-driven peril: wildfire. These are killing and injuring more people, and causing insurers to pay out increasing amounts, he says.
The canary is dying
“The insurance crisis in California and other states is a direct result of our failure to address the climate crisis,” says Jones. In at least 18 states across the country (and not just the West, the Gulf and Atlantic states, but the Midwest and New England too), he says, Insurance companies are experiencing increased losses from “more extreme and severe weather-related events7, which in turn are driven by climate change, which in turn is driven by our failure to transition from fossil fuels and other greenhouse gas-emitting industries comprehensively and fast enough.”
Unless we transition away from fossil fuels, extreme weather—and their frightening impacts on insurance—will only accelerate.
“There is no place in the United States where there's a get-out-of-climate-change-free card,” he emphasises. While the impact of climate change on insurance markets might have different degrees of severity depending where you go, “it's happening everywhere.”
“Insurance is the climate change canary in the coal mine, and the canary is dying,” says Jones.
This is part 1 of The Condor’s interview with Dave Jones. Part 2, out next week, will look at SB 222, the exciting new insurance bill introduced in the California Legislature–and what it could mean for both consumers and climate polluters.
FURTHER READING
Only two small insurers exited the market entirely, impacting roughly 30,000 to 40,000 policyholders each.
These reserves are the money that is set aside so that insurance companies are able to pay out for claims emanating from catastrophic events like the LA wildfires.
No joke! My husband and I are customers of the California FAIR Plan for the fire insurance covering the home we own in rural, inland Mendocino County. This year’s premium is costing us over $9,000. As it only covers fire, we also have to pay another insurer to provide home insurance for non-fire risks. This brings our total home insurance bill to over $10,000 for the year.
Consumer groups have criticized the current Insurance Commisioner, Ricardo Lara, for having a relationship with the industry that they consider as being far too cozy.
At the time, the FAIR Plan had less than $400m cash on hand.
Whether or not $1 billion will be enough remains a mystery—for now. Jones says there were a lot of assumptions made when calculating how much money to request. One is that, of the claims the FAIR Plan will receive from the LA fires, just 45% of those claims will be “total losses,” while an equal amount will be “partial losses.” If those percentages change (very possible—as people return to their properties and are better able to determine to the extent of the damage), there could be more “total losses” than the anticipated 45%. If that’s the case, the FAIR Plan could very well end up having to ask for an even bigger bailout.
One analysis, by the firm Gallagher Re, puts the economic losses resulting from “natural catastrophes” at $417 billion in 2024. $154 billion of that was covered by insurance.