Thanks to the state’s funky way of regulating insurance, residents in fire-prone areas have little reason to move out of harm’s way after the last ember has cooled, says Ray Lehmann, an insurance policy expert at the R Street Institute. “California makes it really difficult for the market to do what it would normally do in these cases, which is when assessments of risk go up, insurance rates go up, and a place becomes less attractive to build there,” he says.
As with many of California’s problems, its dysfunctional insurance market can be traced back to a decades-old ballot initiative. Passed in 1988, Proposition 103 expanded the mandate of the insurance commissioner, who is responsible for approving rate increases. The law also allows for extensive public input on any proposed rate hike. As a result, insurers are slower to respond to risk and less able to write policies that discount fire-safe practices on an individual basis—say, by charging less for having a stone porch instead of a flammable wood one.
Craziest of all, California regulators are forbidden from setting policyholder rates based on future risks (increasing incidences of wildfire due to climate change, for instance) or the increasing cost of the reinsurance on which property insurers rely to protect themselves. Insurance providers are being squeezed as reinsurers, acting rationally, raise their prices, but the primary insurers can’t increase their own rates to reflect the risks that all parties have identified.
The consequences of this system are twofold. First, as the state’s Department of Insurance noted in a lengthy January 2018 report, some people are having trouble getting insurance in the first place for properties in very fire-prone areas. Because insurers can’t sell them policies that reflect the actual likelihood of their houses burning down, they won’t sell them insurance at all.
The second consequence is that those homeowners who do get insurance are not paying what they should—and since they’re insulated from the true cost of the risk, they end up building in areas they shouldn’t.
“There is not an incentive when they rebuild to rebuild to a better standard and use better practices,” Lehmann says. “That’s the bigger concern.”