Losing a home and cherished belongings is an incredibly distressing situation for anyone. But when there's no insurance to cover the losses, the distress escalates into a disaster for the homeowner.
Many Los Angeles homeowners are currently dealing with the reality of significant financial exposure due to a lack of insurance coverage in their properties, with a massive scale of uninsured losses becoming apparent.
What are the reasons behind the high number of uninsured homes in Los Angeles?
Over the past year, thousands of insurance policy renewals have been canceled. State Farm, the largest insurance provider in the area, covering over 250,000 homes in LA County, has dropped 1,600 policies in the Palisades region as of last July, and more than 2,000 policies in other zip codes within LA.
Their spokesperson mentioned that "California's insurance market is uniquely complex, but we continue to work with state officials to increase the availability of insurance for residents."
The situation with State Farm is mirrored by other major insurers in the area. According to data from the California Department of Insurance, from 2020 to 2022, insurance companies opted not to renew 2.8 million homeowner policies in the state. More than half a million of these non-renewals were in Los Angeles County.
However, at enormous astronomical costs. The LA Times mentions one homeowner, Francis Bischetti, who received a renewal quote of $18,000, up from $4,500 the previous year, for his home in Pacific Palisades.
Like many homeowners who are facing extremely high insurance costs or are having trouble finding an insurer, Bischetti chose not to purchase coverage at all, essentially going without it. Unfortunately, Bischetti's home was totally destroyed in a fire on Tuesday.
As the effects of the climate crisis intensify, it is likely that residents in an increasing number of cities and countries will be unable to secure insurance coverage for their homes.
An estimated 7 percent of UK households may not have access to insurance due to it being unavailable or unaffordable.
Homeowners have been utilizing insurance payments to rebuild their residences. However, local mayor Valérie Desjardin asserts that these individuals will be 'double penalized' as they invest in homes classified as 'uninsurable.'
Reviewing natural disasters in 2023, including storms and flooding in Italy and Eastern Europe, Munich Re found that nearly 90 percent of the losses were uninsured.
In recent years, the number of homes not fully covered by standard insurance has grown rapidly. One in every five insured homes does not have a full policy. Many choose to forgo liability protection and other supplementary coverages, while some actually fake or alter their address to qualify for lower-priced policies meant for other areas.
When a homeowner in the United States cannot secure insurance through usual channels, the Fair Access to Insurance Requirements (FAIR) plan serves as a backup option. FAIR is funded by California's private home insurance companies, not the general public.
Until 2020, the total number of homeowners receiving insurance from the FAIR Plan remained stable at approximately 1.4 million. However, by 2022, this figure increased to 2.3 million, and by 2023, it jumped to 2.7 million.
Homeowners in the Pacific Palisades zip code have been affected significantly, according to the latest data. The number of homeowners covered by FAIR, which has surged 85 percent from the previous year, amounts to 1,430 in September 2024.
Across the state, the number of policies under the FAIR plan increased from more than 200,000 four years ago to 452,000 last year. In Pacific Palisades, about one in seven homes were insured under FAIR.
Acquiring a home insurance policy through the FAIR (Fair Access to Insurance Requirements) plan comes with a significant cost. Alternatively, as indicated by Bankrate, the average cost of a policy through the FAIR Plan is approximately $3,200 (€3,140), which is more than double the cost of a standard policy.
Despite the high costs associated with these policies, the California FAIR plan is facing financial strain due to natural disasters. One lawmaker, Jim Wood, stated at a hearing in March, “I’m concerned that we’re one bad wildfire season away from complete insolvency.”
Severe blaze season might be knocking at our doorstep right now.
California is planning to require insurance companies to provide coverage options.
Severe damage is still being evaluated, but it is anticipated to be the costliest in US history. Accuweather forecasts that insured losses will reach billions of dollars, totaling between $135 and $150 billion (€132 - €147 billion).
"California's current wildfire will be the most expensive in state history," according to Jonathan Porter, the chief meteorologist at AccuWeather. He added that it may also be the most costly wildfire in US history because it is occurring in "populated areas with the nation's highest valued properties".
According to credit ratings agency Moody's, the Pacific Palisades area is one of FAIR's largest areas of exposure, with insured assets valued at approximately $5.9 billion (€5.7 billion). In addition to this, claims related to daily living expenses and business interruption are expected to contribute to the overall cost.
The consumers are unlikely to accept any further measures for many years to come and will likely reject additional policies. However, California believes it has a solution to the crisis.
Recently, a new state-law requirement was introduced. As a result, insurance companies will have to provide coverage to homeowners living in areas at high risk of wildfire. The new rules mandate that at least 85% of each insurance company's portfolio must be dedicated to covering properties in risk areas. This requirement will be gradually implemented, with 5% incremental increases every two years.
Commissioner Ricardo Lara's plan to put in place sustainable insurance options for Californians is underway. This initiative promises to provide more choices for people to protect their homes and properties. According to Commissioner Lara, insurance companies will be able to utilize 'catastrophe models' to set higher rates for policies in areas with heightened risk.
How is climate change increasing insurance costs?
A US Senate report released last month forecast that "climate-related extreme weather events will become both more frequent and more violent, leading to a growing scarcity of insurance and steadily increasing premiums."
They are reclassifying some properties initially deemed low-risk as high-risk locations, leading to increased premiums and in some instances, insurers are refusing policies.
The storms are responsible for the majority of global weather-related insurance losses. Altogether, they account for approximately $600 billion (€567 billion) in insurance claims, with the costs being borne by policyholders.
In 2024, the total amount is expected to be approximately €3 billion. Estimated overall losses due to natural disasters for 2024 alone are projected to exceed $135 billion, equivalent to approximately €128 billion.
Severe weather events, such as floods and droughts, are now typical endorsements in insurance policies.
Drought and flooding are not automatically included in insurance policies, and they must be specifically added as extra coverage.
The European Insurance and Occupational Pensions Authority conducted research into climate change and insurance in 2022 and found that "a lot of work still needs to be done in order to prepare for these changes."
Several respondents were unable to supply the necessary details for an assessment of this kind, even though insurers typically regard such risks as an expected and acknowledged fact.
The situation in LA should serve as a wake-up call for European homeowners and insurers to take action. The escalating losses due to natural disasters linked to climate change are unavoidable, and it is imperative that homeowners ensure their insurance policies are adequately prepared to cope with the worst-case scenarios.
