California’s regulations prevent insurers from using advanced computer models to assess the increased wildfire risks due to climate change, and this has caused US insurers to leave the state. State Farm and Allstate have both stopped accepting new insurance policies in California due to rapidly growing catastrophe exposure and wildfire-related losses. The state’s regulations require wildfire insurers to set rates for annual catastrophic coverage as a fraction of damages accrued over 20 years, without factoring in models that can account for accelerated land use change, weather trends, and vegetation. This lack of modern models is one of several practices that impairs insurers in the state, according to Janet Ruiz of the Insurance Information Institute. The state’s insurance regulatory system, established in the 1980s, is poorly suited to handle the worsening risks of wildfires due to climate change. The 20-year average calculation method no longer accurately predicts damage, and this has led to insurers writing more policies and taking on more risk. Insurance industry losses have totaled 20 years of underwriting profit in the last six years. California prohibits insurers from passing reinsurance costs to customers, and this is seen as another ongoing challenge for companies in the state. While a modernized insurance rate formula informed by cat models wouldn’t fix California’s market alone, premiums that perfectly capture wildfire risk might be too high for many people to pay. Therefore, reducing the risk of wildfires through preventative measures is also important. This includes removing dead trees, cutting back landscaping, strengthening building codes, and understanding how fires spread. Start-up companies also offer ways to detect and suppress fires before they spread. The federal government is also addressing the challenges faced by insurance markets due to climate change. The White House Council of Economic Advisers and the US National Oceanic and Atmospheric Administration have launched initiatives to study climate pressures on insurance markets. California’s insurance system may need to be re-evaluated due to State Farm’s decision to stop accepting new policy applications, as the insurer’s action affects everybody in the state, according to Michael Wara of Stanford University.
Insurance companies abandon California due to inability to accurately calculate rates based on risk – Orange County Register
