“I think we are on the brink of a major financial crisis for the insurance industry,” says Daniel Aldrich, director of the university’s Resilience Studies Program and co-director of the Global Resilience Institute.
As California firefighters continue to battle multiple wildfires around Los Angeles, experts are sounding the alarm that a wildfire is imminent. crisis in the insurance sector it would have huge implications for the state’s recovery efforts — and for how homeowners rebuild.
“I think we are on the verge of a major financial crisis for the insurance industry,” says Daniel AldrichNortheastern professor, director of the university’s Resilience Studies Program, and co-director of the Global Resilience Institute.
Early estimates of insured losses from Pacific Palisades fire hover around $10 billion, reports say to show. Total losses for Los Angeles are projected between $20 billion and $50 billion.
Since 2019, more than 100,000 Californians have been locked out of their insurance company as the region experiences more frequent and intense wildfires, according to a San Francisco Chronicle. analysis. Insurance companies have raised their rates, canceled or not renewed their policies, or even left the state altogether.
This has been the story for some time.
“What happened in California was that, well before these fires, State Farm and a number of other insurers began abandoning their policyholders, claiming – and this has been going on for about a year now – that their risks were too high for them to remain solvent in California,” Aldrich says.
“Just to give you an idea of what that means: Of the 12 major insurers in the state, at least five have pulled out completely or stopped writing new policies statewide,” Aldrich says. “It’s a big deal.”
California officials saw what was happening, Aldrich says, and last year moved to modernize its FAIR plan, a government-backed program often called the state’s “insurer of last resort.”
Created after a series of wildfires in the 1960s, the FAIR plan charges higher rates than private market insurers and offers a “maximum reimbursement” policy ($3 million for residential policyholders and $20 million dollars for commercial policies per location) instead of a replacement policy.
There are now approximately 450,000 FAIR insurance policies statewide, more than double the number in 2020. According to the Los Angeles Timesevery company in the state contributes to the plan’s expenses. (The Los Angeles Times also reports that the program is “dangerously expansive,” worth about $300 billion, including only $200 million in excess coverage.)
It will be a challenge to rebuild
If claims exceed FAIR’s reserves, private insurers still operating in the state will step in to cover the first billion dollars of shortfall. But Aldrich notes that even if the FAIR program is able to reimburse its policyholders, homeowners will face an uphill battle to build.
“So far, we know that 10,000 homes have burned in the Palisades, worth only $3 million per home,” Aldrich says. “Let’s say California FAIR actually manages to pay these insurance policies. The cost of rebuilding will be much higher than that $2.5 million to $3 million.
Why then? Aldrich continues: “Because after the shock, the labor market and the materials markets were criticized; Many Palisades homeowners will want to rebuild their homes in the coming years, which means all contractors will be in demand. This is what happened in New Orleans in the aftermath of Katrina. So, labor prices and the prices of materials like wood and steel will skyrocket.
Aldrich says California is bracing for a different kind of disaster in the coming days.
“As the reality of the damage begins to become clear, we could see catastrophic failures – both from the withdrawal of companies still operating, but also from bankruptcies and bankruptcies,” Aldrich says. “We saw hundreds of small, local businesses across Louisiana go bankrupt after Katrina because they simply weren’t prepared to offer compensation for the damage.”
This shouldn’t be a surprise
There are no simple answers for how to mitigate the effects of these disasters, Aldrich says. This begs the question: should humans start building in such disaster-prone areas in the first place?
Joan Fitzgerald, a professor of public policy and urban affairs at Northeastern University, argues that we shouldn’t do it.
“That this happened shouldn’t have surprised anyone,” Fitzgerald said. “That Miami Beach is constantly flooded should come as no surprise to anyone. The fact is that we are building in places where we should not have built in the first place. »
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Faced with the acceleration of natural disasters caused by climate change, the insurance sector must face a new reckoning. Insurance rates across the country have increased in response to climate change; despite this, California’s rates have generally remained below average compared to states like Florida and Texas.
Last year alone, natural disasters across the world – including earthquakes in Turkey and Syria and wildfires in Hawaii – resulted in around $100 billion in insured losses, according to Reuters.
“It’s human hubris that we can ignore Mother Nature,” Fitzgerald says. “My point is not how to rebuild to be more resilient, but how to think about whether there are places where we can can’t – or should not – rebuild. And the Palisades, in particular, is one of those areas that is completely vulnerable. This is what we know in advance.