Last week, Allstate told the San Francisco Chronicle that it had stopped issuing new homeowners policies in California after years of taking wildfire losses, citing an inability to raise premiums enough to break even. The news came just days after State Farm, California’s largest insurer, announced a similar decision. Although there are still plenty of insurers working in California, Allstate and State Farm lead a growing list of big competitors headed for the exit.
Advocacy group Consumer Watchdog demanded that state Insurance Commissioner Ricardo Lara drag State Farm back onto the market, claiming it has the authority under California Proposition 103, a 1988 measure that requires companies to obtain state approval to increase rates. The founder of the consumer group is also the author of the proposal, which was designed to keep rates low.
But forcing insurers to resume issuing homeowners policies will not address the core issues of weather risk and artificially lowered insurance rates. Despite the constant threat of earthquakes and the large and growing threat of wildfires and floods, California has one of the lowest homeowners insurance rates in the country, as a percentage of median household income, less than Georgia and Virginia. Occidental, according to Bankrate data. .
Of course, this statewide average sidesteps the exorbitant cost of insuring a home in, say, fire-ravaged Paradise, or anywhere else within the dangerous wildland-urban interface. Increasingly, the only people who can build or rebuild in such places are those wealthy enough to afford skyrocketing premiums and fire-resistant building materials and techniques. The result is “gentrification by fire,” as the Washington Post called it.
It’s a big problem for a state with a chronic shortage of affordable housing. And the California situation is not unique. Across the country, NIMBYism has made it nearly impossible to build denser housing near workplaces, forcing non-wealthy home seekers to the cheaper fringes of the suburbs, where the risk of disasters is higher.
People fleeing the California fires often end up in the pans of Arizona or Texas, which are at increasing risk of drought, extreme heat and other problems that climate change is making worse. They rush to these places not because they are ignorant of the risks, but because they need work and shelter and the prices have kept them out of safer places.
It’s no coincidence that most of these places are also experiencing insurance crises, with providers dropping or raising premiums in risky areas. You cannot get a mortgage in this country without insuring the house. So from California to Florida, many buyers are stuck with last-minute state options. These are often more expensive and offer less coverage than private alternatives, and your finances are precarious. More people are at risk of having too little coverage in the places where they will need it most.
Kenneth Klein, a professor at the Western California College of Law in San Diego, says one possible solution would be to force insurers to offer policies that cover all potential disasters, at the same price, everywhere in the state. This would actually pool risk, make coverage more affordable, and protect insurers from being undermined by competitors. Such an approach could solve the problem of California’s Proposition 103, setting sustainable insurance rates that keep consumers and businesses happy, at least in the short term.
But it would not address the long-term problem of climate change that makes parts of the country not only uninsured but also uninhabitable. For such areas, the only long-term solution is “managed withdrawal,” the process of slowly moving people to safer locations.
For a long time, the obvious candidates for such a withdrawal have been some coastal communities at risk of being wiped out by storms and rising sea levels. But controlled withdrawal is already becoming necessary on dry land.
Arizona took a major step in this direction last week, restricting development in fast-growing Phoenix suburbs that lack an adequate water supply. It’s a welcome acknowledgment that climate change and perpetual misuse have left the Colorado River and groundwater supplies unable to support unlimited human settlement in such a scorched place.
A withdrawal from vulnerable areas that does not punish economically vulnerable populations by leaving them homeless will be difficult to manage. It will require more of the realism that Arizona just displayed, a willingness from the government to pay homeowners to move, along with a “Yes in my backyard” thinking that the entire country will need to make affordable housing abundant in areas safe.
The alternative is a status quo in which insurers continue to suffer huge losses, homeowners and governments are stuck with billions of dollars in uncovered damage claims, and harsh market judgments that make the poor and middle class dry up. Retirement is in our future. We still have the power to choose whether it is in a panic or in order.
More from Bloomberg’s opinion:
• Mushrooms may hold the secret to solving the climate crisis: Amanda Little
• The Supreme Court’s Confusing Water Decision Explained: Stephen L. Carter
• AI robots cannot clean up our plastic-infested oceans alone: Lara Williams
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Mark Gongloff is a Bloomberg Opinion editor and columnist covering climate change. A former managing editor at Fortune.com, he led HuffPost’s business and technology coverage and was a reporter and editor for the Wall Street Journal.
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