Climate change and insurance: The alarm bell we can't afford to ignore

www.theclimatebrink.com Climate change and insurance: The alarm bell we can't afford to ignore

Insurance markets are the canary in the coal mine

11 comments

I've been trying to highlight this issue in conversations around fire risk. Its easy to want to throw the big bad evil insurance companies under the bus, because they are, well, big, bad, and evil. Sure. But what they are not is bad at math. They (along with reinsurance) have very carefully calculated their risk exposure in places like the California west, and determined that at the current prices they can not make a buck. Hate them all you want, sure. But recognize them for what they are and try and understand why they are choosing to not 'make money' in some situations.

Couple this with something like the California FAIR plan. This is the insurer of last resort in California. A kind of quasi private insurance company whose losses are subsidized like by the regulated marketplace. California recently passed a law requiring insurers give discounts for mitigation. However, if you read through and do the background research on the mitigations, few of them are backed up by any kind of reproducible study to determine if they are effective at reducing risk. The FAIR plan is the worst of these. Their standards show almost no indication that the mitigation actions will reduce risk (with some exceptions like the 0-5 foot zone management). The discounts are expected to come in at between 10-15%. So now you have even more burden from the riskiest of carries being pushed onto the regulated market place by the FAIR plan (depending on how many people take up the subsidy, which I think will be many). Couple this with the fact that the FAIR plan has put on 150k new policies in the last few years (I think they are currently standing at about 350k insured).

This is why State Farm pulled out. This is why Geico isn't writing new policies. Its a bad bet that you are almost certain to lose money on and insurance companies arent in the business of making bad bets.

I've heard industry insider speculation that at around 500k on the FAIR plan, the whole system goes tits up. My guess is that its actually around 420-440k. When this happens all the major insurers and reinsursers will pull out because the risk is just too high.

Any mortgage that requires PMI will go belly up. Property values will plummet. Cats will be sleeping with dogs. Bedlam I tell you.

What home owners don't want to hear though is that this is about how you manage your risk. Wildfire risk can be mitigated but it requires individuals to take meaningful action to reduce their risk. Whole communities have to act in concert to change their behavior.

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- Not even about making a buck, but about surviving. Why write a policies for an area when claims that will likely happen would bankrupt the company? That's what happened to a lot of small insurance companies way back when Andrew hit Florida (it's the first time I recall news about insurance companies running away). I think they are a necessary evil and will take you for everything if you aren't careful, but I can't fault them for seeing the obvious. At their core is the math, and the math is saying hell no.
  
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- Do you have a link to a resource about some of the mitigations?
  
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  You can check this out: https://kb.madronus.com/
  
  Its a hand book my colleagues and I have put together as part of our wildfire risk inspection work. We've collated the best practices from all resources possible and merged them into one location. I think its probably one of the most comprehensive documents around wildfire mitigation that exists.
  
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It means we need to start seriously talking about risk mitigation.

If you’re in a fire area, you need to pay for forest debris clearing and removal of trees from near structures.

If you’re in a hurricane area, your residence will need to be built to certain standards to resist flooding and wind damage.

We already had reforms to building codes in regard to earthquake preparedness about a century ago.

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- regard to earthquake preparedness about a century ago
  
  Yeah but for fire specifically, its not just what you do or how you build that matters. It pretty different than other perils because risk is emergent of individual management paradigms. For example, this guy got non-renewed because of debris stored under his eves and around the structure.
  
  When this happened, I pointed out that his management of his property was precisely why he was being non-renewed, and the comments came back extremely defensive about how he was managing his space. The commenters didn't seen anything wrong with how he was managing his space; I saw everything wrong about how he was managing the space. Granted it was hackernews so it was more of a libertarian response, as in "He should be allowed to do what he wants in his space". Sure. But realize that puts him at risk, and more importantly, it puts his entire community at greater risk of a catastrophic loss.
  
  I think people are woefully underestimating the risk they face and completely failing to recognize the role the take in creating that risk. People don't want to hear it, but it is quite literally in their hands.
  
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  I’m not sure I understand how that’s a different paradigm from earthquake preparedness, like to be ready for an earthquake you have to build and maintain your structure in a certain way. That guy in your example failed the “maintain” part of that, seems like it should be treated the same.
  
  Also no shit you shouldn’t pile flammable material next to your house in a fire zone, seems pretty intuitive. Plus all that guy needs to do to get covered again is to move the debris. Seems like a case of being intentionally obtuse to prove some individualist point, hilariously and ironically undermined since he’s seeking the collectivist protection of insurance in the first place.
  
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