the forthcoming future of decent portions of America

or: climate change, insurance markets, and how fucked we are

Alyaza Birze (January 11)

back on Cohost i briefly talked a few times about the insurance market and how completely fucked it is; however, this deserves a more lengthy consideration in light of the disastrous wildfires this week in California. to put it shortly: consider this a likely shot across the bow for what to expect as climate change gets worse; events like wildfires, floods, and hurricanes get more frequent and damaging; and insurers get squeezed on the properties they protect.

a brief overview of a complete disaster

i'm sure i don't need to extensively recap the sheer devastation in California, but: this was and is literally the worst fire event in Los Angeles history. i think there is a decent-to-good chance that ultimately the Palisades Fire (in Pacific Palisades and Malibu) and the Eaton Fire (in Pasadena and Altadena) become the second and third most destructive fires in California history—they will definitely clock in no worse than third and fourth on that list. both have destroyed an estimated 5,000 or structures, and it is likely that they impacted over 10,000 structures each, so don't be surprised if structure loss numbers are revised up again. as of writing, there are at least 11 fatalities—that would be miraculous if it held given the circumstances.

needless to say, this event will go down in history as a measuring stick for what is possible in Los Angeles' future. my suspicion is that this term it is probably going to rewrite how to think about the wildland-urban interface and just how far that actually extends into a city. from the Eaton Fire, for instance, several buildings have burned in Altadena and Pasadena that (in my estimation) are as far as two miles away from the foothills. only the winds relenting and the ability of aircraft to operate seems to have actually prevented the fire from burning all the way to the 210. spot fires were also observed up to three miles ahead of the fire—effectively making any possibility of firebreaks an academic one. it is quite clear that we are extremely unprepared for the future intensity and worst case scenario for wildfires! but, perhaps worse still, we have not even begun to seriously consider whether many of the areas that burned (or could burn) will need to be written off.

the broad strokes of California and its insurance crisis

one reality is that many parts of California are—or should be—uninsurable. companies like State Farm (currently the largest home insurer in California) and Allstate have increasingly reflected this, leaving the state and cancelling many existing policies they do hold. according to AP, in the past two years 7 of the 12 largest insurance companies by market share in California have restricted policies they write or left the state entirely. the uninsurability of many parts of California has also been reflected in the state's increasingly desperate efforts to intervene in the insurance market. beginning this year California will incentivize insurers to not leave by "requir[ing] home insurers to offer coverage in high-risk areas [...] In exchange for increasing coverage, the state will let insurance companies pass on the costs of reinsurance to California consumers." but in all probability—and even supposing this plan works, which is debatable given this week's events—this will necessitate massive premium costs (and spikes) for many people, reflecting their high-risk situation.¹ this is not ideal in a state which already has the worst housing crisis in America.

more realistically the situation will get significantly worse regardless of what California does. this is for a number of reasons, some of which are complicated and some of which are simple. one complicated reason is that for a long time California's insurance industry has been severely constrained by 1988's Proposition 103. Prop 103 is a well-meaning Ralph Nader-led policy that "requires the “prior approval” of the state’s insurance regulator before insurance companies can implement property and casualty rates, including homeowner’s insurance" and makes it so that "property and casualty insurance companies cannot take all the losses associated with one event [...] and then simply put them onto next year’s rates." while this is obviously beneficial for homeowners and has saved them literally billions of dollars in premium hikes, these rules have also subsidized an unbelievable amount of high-risk development that is now coming home to roost. until last month, they prevented insurers from factoring climate change into their premiums; more generally, insurers have not been allowed to price policies according to current or future risk. this was not a good idea and it has also come home to roost. in many cases the only available remedy for insurers if they think they're overexposed to risk is to aggressively cancel policies, as State Farm has done.

but cancelling policies—in many cases—obviously fucks over policyholders because it is a nuclear option. indeed, Pacific Palisades had many State Farm policyholders whose policies were not renewed in March of last year, leaving them scrambling for coverage; as a result many of those households have flocked to California's insurer of last resort, the Fair Access to Insurance Requirements (FAIR) Plan. although intended to be temporary and providing only basic (and narrow, and expensive) coverage, FAIR is an increasingly load-bearing program in fire-prone areas. there are now more than 452,000 FAIR policies—double the number that existed in 2020—and the number continues to grow rapidly. this is both because FAIR cannot deny any person who "has made a diligent but unsuccessful effort to buy home insurance" and because it provides generous coverage of up to $3 million. consequently though, its exposure is massive. in Pacific Palisades alone that exposure is around $6 billion by some accounts. and the FAIR program is also likely insolvent, or close to it. according to Susan Crawford:

As of last June, the FAIR Plan, which may not deny fire insurance to anyone, no matter how risky their property, had a surplus of just $385 million available to pay claims. As of last March, the Plan had about $700 million in cash on hand (in addition to the surplus). It had about $5 billion in reinsurance, after a deductible of about $900 million (as long as that deductible is met by a single event).

as it currently exists the program is not well-placed to resist a massive wildfire shock—much of that $6 billion in exposure in Pacific Palisades has clearly gone up in flames (plus an unknown amount of exposure in Pasadena and Altadena). Crawford also notes that "the Plan's requests for premium increases to match its risks have been taking 18 months to two years to be approved (after substantial slashing) by the California Department of Insurance." given that total insured losses could be as high as $20 billion (with total economic losses in the $50 billion range), there is good reason to assume the program is not in a strong position to immediately cover its losses. it is entirely conceivable—perhaps even likely—that some sort of emergency funding, emergency rate increases, or in the worst case scenario a bailout will be necessary for people to eventually see payouts—to say nothing of the forthcoming teethpulling needed to get those payouts. (FAIR denies all of this and expects to be able to pay out, for what that's worth.)²

and of course there are also a lot of people who are either uninsured or self-insured because of the widespread policy cancellations. those people are generally going to be extremely wealthy or extremely fucked, and sometimes both. i don't think we need to linger particularly on this camp; the wealthy will take their money and go or rebuild (perhaps at onerous cost), the less fortunate will become a part of California's growing homeless population.

counterintuitive outcomes and their problems

disasters often make for complicated and counterintuitive outcomes. strangely, the middle-class and less fortunate in places like Pacific Palisades (at least if they still have insurance) are among the most likely to rebuild. this is because insurance policies are often small relative to current property values in California—another symptom of the state's ongoing housing crisis—making it so that only the state's poorest are able to recoup their losses in full. Jake Bittle, in his book The Great Displacement: Climate Change and the Next American Migration, observed this phenomenon in the aftermath of the Tubbs Fire, which burned over 5,600 structures in 2017:

The Tubbs fire revealed that the insurance equilibrium in [California] relied on flawed math. The home prices in a housing-scarce city like Santa Rosa could get up into the millions, but most fire policies provided only a few hundred thousand dollars’ worth of coverage, insuring only a portion of a structure’s value. This made sense to an extent, since electrical fires and other small blazes might only damage part of a home rather than level it altogether, but it was also a financial decision on the part of the insurance companies. The companies knew that wildfires were still possible, and they didn’t want to be liable for rebuilding an entire neighborhood’s worth of mansions, so they offered only enough coverage to satisfy lenders and homeowners. Thus, in the aftermath of the Tubbs Fire, many victims like José Guzman found that their insurance policies were not sufficient to cover the cost of rebuilding the homes they had lost, and one’s insurance policy set a ceiling on the value of one’s future home. It didn’t matter if a victim rebuilt their home on the same lot or bought a new home somewhere else. Unless she had extra savings to make up the difference, she could only get what her insurance payout would buy.

Strange as it might seem, this dynamic gave the middle-class homeowners in Coffey Park a distinct advantage over the wealthy homeowners in Fountaingrove when it came time to rebuild. Because the houses in Coffey Park were more modest than those in Fountaingrove, there was a smaller gap between the average insurance policy and the average home value, so most victims could afford to build new houses that were similar to the ones they had lost.[...]

now, to the untrained eye this may seem like a very good thing. ideally you would want families to be restored in whole, but the system is still preventing middle-class and lower-income families from being wiped out and rendered totally insolvent just because their houses burned. their neighborhoods and communities can also still be rebuilt where they used to be—something like Paradise, California, where an entire community was wiped out and scattered, need not happen here.

the problem, though, is the combination of California's housing crisis and these low insurance payouts mean the best option—or only option—for most lower-income families is to rebuild where they are. any other option necessitates significant loss or outright bankruptcy. but by rebuilding where they are, many families simultaneously become locked into living in fire-prone areas that will burn again—and therefore into holding properties that should be uninsurable (and eventually will be no matter what). many Californians, in other words, are now stuck with a bag they can only offload at prohibitive cost. Coffey Park is just one at-scale example. it was rebuilt in large part because it was the only place many policyholders could afford, and it was rebuilt in such a way that in the lifetime of these policyholders it will probably burn again. says Jake Bittle:

[The Tran family] insurance policy gave them only enough money to build a Coffey Park–caliber house, and there was only one Coffey Park. Moving back was a difficult decision, but it was also, in many respects, an easy one. Most other residents I interviewed had the same ambivalent journey as the Trans did: they liked the neighborhood, and they liked the idea of moving back, but they also knew they didn’t have much of a choice. Unless a victim wanted to downsize or move far afield, they had a significant financial incentive to stay put. [...] insurers didn’t have any control over fire-safety standards for the rebuilt homes, so the new version of Coffey Park turned out to be just as vulnerable to wildfires as the old one. Since the neighborhood was outside the wildland-urban interface, protected by the freeway, it was exempt from the stricter building codes that the city of Santa Rosa adopted after the fire. The new homes were still spaced just a few feet apart and separated by wooden fences, and many of the new yards were planted with flammable mulch. The new home builders also declined to pay for fire-prevention upgrades like hardened concrete walls and fireproof windows. It might be a long time before another fire skips over the freeway, but when it did, the insurance companies would again get stuck with a massive bill. (emphasis mine)

the same, unfortunately, will probably be true in Pacific Palisades, Pasadena, and Altadena. the wealthy, at least, can generally cut their losses (even if it means returning to a middle class lifestyle—and many of the wealthy in Pacific Palisades certainly will not even have to do that) despite the insurance crisis. they have the ability to move and to turn their properties over, or to rebuild at their own risk. many middle-class people have no such flexibility, and that flexibility is only getting worse.

buying time against the inevitable

one of the truths we are not prepared for in this era of climate change is that many parts of California; the Mountain West; the Atlantic, Pacific, and Gulf Coasts; and entire sections of states like Florida and Louisiana will—purely for economic reasons, not even factoring in other considerations—have to eventually be ceded to nature or left to fend for themselves. everything will be done to resist this (especially if this will be felt most by homeowners), but it will happen eventually.

if you believe that is exaggeratory, it really is not. to continue the example being used throughout this piece: consider that FAIR alone has exposure of over $430 billion from its 452,000 and growing policies (essentially a million per policy)—and there are still literally millions of people for whom FAIR is likely to become the only option sooner rather than later. much of this is and will be concentrated in fire-prone areas that, in one or a series of bad years (like 2017 and 2018), could go up in flames and immediately render the program incapable of paying out without a significant bailout of some kind, most likely from the federal government. in many ways the bet California is making amounts to "if something truly catastrophic happens, the federal government will step in and make it go away." this is a bad bet to make for a lot of reasons (one of those reasons, incidentally, is the particularly grim "wrong person wins a presidential election and just hates California").

as you may be able to infer, though, California is hardly the only state assuming their own policies or the federal government can, against market forces, prop up state insurance markets forever. Hamilton Nolan, in a piece last year called The Insurance Apocalypse Conversation America Won't Have, lays out some of the absurdity of what is happening, saying: "[...]what we are really dealing with is sort of the paper fiction of insurance—just enough to keep the real estate market pumping and stave off immediate exodus, with the implicit knowledge that in the worst case scenario [...] states will run to the federal government for a bailout, and then keep on doing the same thing."

the state of Florida in particular—California's Wario, you might say—is speedrunning this same problem as over a dozen of its insurers have bolted and the constant threat of hurricanes has turned the insurer of last resort Citizens into a massive and growing liability. for five years now the state has been locked in an interminable battle with its own insurance market, forcing hundreds of thousands of people off of Citizens and onto private insurance every year in a desperate bid to artificially float the market and to simultaneously reduce its own liabilities. and yet every year, Citizens gains new policyholders. no amount of clearing the rolls can save parts of Florida from being uninsurable outside of everyone subsidizing high-risk areas, so that is what happens. it is pretty unambiguous that Florida expects someone else to pay for its mistakes, too: CNN quotes Mark Friedlander, an industry trade group guy, as saying "Citizens is allowed by state regulations to implement a premium surcharge to its policyholders and other Florida consumers to ensure all claims are paid." even if you aren't a Citizens policyholder, if you are a resident of the state of Florida one day you will be paying for someone else's property being lost.

or, at least, you will be under the generous assumption that money can even be recouped from Florida citizens at all. the state has seen premium increases averaging nearly $1,300 a year—by far the most in the country—and presumably many Florida rateholders are not super interested in subsidizing someone else's problems on top of that. but more pressingly: literally hundreds of billions of dollars are tied up in cities like Miami, and many of those assets are completely fucked (and, incidentally, covered by Citizens!) in the not-too-distant future between warming oceans, stronger hurricanes, saltwater intrusion, and rising seas. it is rather improbable that all of this will be paid for by the state of Florida and its citizens.

learning to let go

one other forthcoming reckoning—and something that informs the shape of the expectation that the federal government step in to keep everyone solvent after a natural disaster—will be with the 30-year mortgage and the nature of homeownership. Polly Mosendz and Eric Roston, writing for Bloomberg Green and touching on some of the aforementioned problems that lock people into disaster-prone areas, observe that:

Homeowners in Florida and California have already been trying to reconcile their mortgage duration and dwindling insurance options with neighborhoods that may not live to see 30 years. In a nation where long-term loans are the gateway to homeownership for most families, climate change is rewriting the basic assumptions about risk. The lending industry relies on insurance to absorb some of the risk of mortgages failing. And the insurance industry is largely predicated on the idea that if a home is damaged or destroyed, a comparable structure should be rebuilt on the same spot. This model will have trouble accommodating land changed beyond recognition, no longer able to host a dwelling.

for many homeowners, huge portions of their wealth are tied to that homeownership—something that is increasingly hard-won and pricey, especially in places like California. but it is increasingly unreasonable to assume that a home which exists now should continue to exist indefinitely, uninsured or insured. consider—even if we were somehow able to freeze global warming at 1.2C—what a home in Los Angeles or Miami might deal with between now and 2055. even in ideal circumstances there are still tens or hundreds of thousands of homes that will be effectively worthless by 2055 due to their risk profile and potential for burning. since we cannot freeze global warming, of course, climate change is set to make this much worse in every way possible. many homes that have been built, simply put, should not be there.

there is not a particularly good way to remedy this—and because any policy would necessarily involve hardship and grief for potentially millions of homeowner there is certainly no way to remedy this which is acceptable in the current Overton window. whether people are prepared for it or not, though, something will happen. insurance is one of the only industries taking climate change seriously, and the numbers are already very, very bad! basically every other aspect of property ownership, meanwhile, is not equipped for the world we live in now, and the world we'll be living in soon. one of the great political issues of the next thirty years—whether this is implicit or explict—will be who sets the terms for forthcoming mass displacements, and how those terms are implemented. will it be homeowners, who have a mess of interests? will it be politicians, who demand insurers continue to subsidize high-risk areas until it's too late? will it be insurers, who one day simply declare whole swathes of America uninsurable? personally—and although this would obviously need to be among the costliest programs in US history—i would hope for some sort of managed buyback and relocation scheme that attempts to get people out of dangerous homes and into more stable, satisfactory ones. their former properties would then be rewilded but i find it disturbingly plausible that the future will just be a horrible combination of interests with minimal benefits—a system which fucks over everyone while supporting almost nobody.

as one person on Bluesky grimly noted:

Americans have somehow settled on demanding a mixed economy that features none of the benefits of free market capitalism or command socialism, but all of the liabilities of both.

footnotes

¹ this idea, in my opinion, also just sounds unbelievably bad:

The rule will require home insurers to offer coverage in high-risk areas, something the state has never done, Insurance Commissioner Ricardo Lara’s office said in a statement. Insurers will have to start increasing their coverage by 5% every two years until they hit the equivalent of 85% of their market share. That means if an insurer writes 20 out of every 100 state policies, they’d need to write 17 in a high-risk area, Lara’s office said.

² an issue with taking the word of FAIR here is that the insurance crisis, in its most distilled essence, is "insurers not wanting to tell homeowners sweet lies about how insurable their properties are, and people and politicians wanting to make them tell those sweet lies anyways." FAIR—by virtue of being a state-administered insurer of last resort (that also literally cannot reject most people)—is under even more pressure to tell those sweet lies, and to thus be fast and loose with its solvency (at least in public).