At the start of the wildfire season, California’s Insurance Regulatory Agency endorsed major changes to prevent residential homes from being built in fire-prone areas.
The proposals, many of which require state approval, could reshape the real estate market in parts of California and are the latest sign of how climate change is wreaking havoc on parts of the American economy.
On Friday, Insurance Commissioner Ricardo Lara endorsed proposals to end government funding of infrastructure in certain fire-prone areas, leave vacant lots and expand stricter building codes.
“These ideas will be a challenge,” Lara said at the beginning of a meeting of the climate insurance working group that he had set up and that recommended the changes. “We are really breaking new ground.”
The construction industry quickly resisted the recommendations. Dan Dunmoyer, president of the California Building Industry Association, said there was no need to curtail development because building standards were already strong enough to protect homes in high risk areas.
“If you build according to the minimum requirements, you are building a fireproof home,” said Dunmoyer. He added that if the state wants to keep insurance available in these areas, it should allow insurers to increase their tariffs.
The new proposals mark the latest chapter in California’s battle against the year-long record-breaking forest fires that began in 2017. These fires resulted in homeowner insurance claims that were unsurpassed in number and size, which in turn caused insurers to lose enormous profits over decades.
In response, insurers have started pulling out of fire-prone areas, threatening people’s ability to buy and sell homes, which depends on access to affordable insurance. Because banks usually require insurance as a condition for granting a mortgage.
The state has taken a number of increasingly aggressive steps, including a temporary ban on companies dropping some customers after forest fires. But these steps were supposed to be a stopgap measure as state officials looked for more permanent changes that would allow the insurance industry to continue doing business in high-risk areas.
California’s experience could become a model for the rest of the United States, which has weathered a series of devastating forest fires, cyclones, floods, and other disasters.
In addition to the human sacrifice, these disasters have put increasing pressure on the financial sector and prompted large investors to warn of a “systemic threat” to the economy. President Biden last month urged federal officials to prepare for financial shocks from climate change, including disruptions in the insurance market.
The proposals approved by Mr Lara provide an insight into the scale of the changes that may be needed to prepare for these shocks.
The recommendations include changes in the insurance industry itself, such as making it easier for insurance companies to charge higher premiums based on the expected damage from future disasters. Currently, they can only apply for higher rates based on previous losses.
However, other proposed changes reflect the growing consensus among experts that increasing climate risk is fast becoming uninsurable – and if governments want insurance to remain affordable, new ways must be found to limit people’s exposure to that risk.
In California, as in most other states, local officials have significant control over where homes are built. These officials face strong incentives to allow construction in fire-prone areas: new houses mean more jobs and more housing, which leads to more tax revenue.
But expanding the development to fire-prone areas is also associated with costs, for example for fighting forest fires, evacuating people and then repairing damage. A significant part of these costs is borne by the state and the insurance companies, which have little influence on the decision to build there at all.
The recommendations urge the state to put pressure on local officials to be more selective about where new homes can be built, even if it means stopping government support. The state should determine the areas in which the climate risk is “too high for state money to be used to support new developments and infrastructures,” according to the working group.
If the local authorities want to build in high-risk areas, the recommendations call for the strict building standards to be expanded. California already has one of the toughest building codes for areas exposed to forest fires, but those codes only apply to the most dangerous areas.
And if local officials insist on building in places exposed to forest fires, the recommendations demand that those homes not be insured through the state’s FAIR plan. This state-mandated plan is California’s insurer of last resort; It provides coverage to homeowners who have been denied traditional coverage. Without access to the FAIR plan, homeowners run the risk of not having any insurance at all.
“If the availability of insurance is guaranteed for all new developments, houses can be built in areas where no private insurer is willing to take out insurance,” the report said.
The Personal Insurance Federation of California, which represents the industry and was represented on the working group, said it supported the recommendations.
Senator Bill Dodd, a Democrat whose district includes Napa, Sonoma, and other areas badly affected by the recent forest fires, said he was open to many of the recommendations, including discontinuing access to the FAIR plan for new homes in high risk areas and the disruption of infrastructure spending and expansion of building codes. “We need to rethink our development” at these points, he said.
He said he believed these ideas could be supported by other Sacramento lawmakers as well. “A lot of my colleagues have the same problem with their constituents not being able to get insurance,” said Dodd. “You are open to listening.”
In an interview, Mr Lara said the state is harming homeowners by allowing construction in these places.
“Owning a home that is depreciating because it is not insurable is really not affordable – it’s a false promise we make to future homeowners,” Lara said. “We have to have an honest conversation before we get into any of these sensitive areas: Do we really see the risk? Or will these communities only exacerbate the problems we already live under? “