AMNA NAWAZ: The smoky air that shut down so much outdoor activity in the Northeast last week was a sobering reminder of the widespread impacts of wildfires and climate change.

There's been a different kind of impact in California as well, one that's also partially tied to wildfires.

William Brangham focuses on that part of the story and what it could mean for insurance in the Golden State.

WILLIAM BRANGHAM: For years, State Farm has been the largest provider of homeowners insurance in California, but it recently announced it will no longer sell new homeowners policies in the state.

It said this move was driven by the high cost of construction and the growing risks from catastrophes like wildfires.

State Farm's move followed a similar one by Allstate insurance and other pullbacks from insurers like Chubb and American International Group, who decided not to renew some existing policies.

So, what does this mean for homeowners and other businesses in a state with increasing risks from wildfire and other extreme climate-driven events?

Michael Wara is a lawyer and senior fellow at the Woods Institute for the Environment at Stanford University.

Michael, thank you so much for being here.

Can you tell us a little bit more about what's driving this move by the insurance companies?

I mean, they cited these two risks, the increasing risk of fires burning structures and then the increased cost of building or rebuilding those structures.

What else is there?

MICHAEL WARA, Stanford Woods Institute for the Environment: Well, I think what's driving a lot of this instability in the insurance market really has to do with the rapidly changing risk of wildfire interacting with a regulatory system which, by design, changes quite slowly and allows -- in particular, allows price increases that occur very slowly.

And so we sort of have a lag.

And the challenge layered on top of that has been, as everyone has experienced, increasing inflation, and, in California, particularly increasing costs for construction.

So, the insurers are stuck between quickly increasing risk and slowly increasing allowed insurance pricing.

WILLIAM BRANGHAM: So, you mean that if the insurers were really treating this as the cost of doing business, they might increase rates more rapidly than the state allows by law?

MICHAEL WARA: That's right.

I think many of the insurers have been slowly increasing rates, since catastrophic fires that your viewers may remember occurred in 2017 and 2018, the Napa, Sonoma, fires, and then the Camp Fire after that.

That really reset insurers' vision of what kinds of catastrophes were really possible in the state of California.

And that increased risk needs to be priced into rates eventually.

The California insurance regulatory system allows for very slow adjustment in prices, and doesn't allow currently for insurers to price in the risk of climate change as it is today.

The prices are set by looking backwards at the risk as it has been over the last two decades.

And that just means a slower pace of adjustment.

And that's leading to real problems for the industry.

WILLIAM BRANGHAM: And so what does this mean for homeowners and people who want to buy or sell a house in California?

I mean, this is not something you can really dispense with.

MICHAEL WARA: For the last several years, it's been getting harder and harder to find the sort of standard insurance product, especially for homes in high-risk areas in the state of California.

So it's made it harder to buy and sell homes.

People that have policies have mostly been able to keep them, but a small set of existing policyholders have also lost their what's called admitted lines.

That's the standard homeowners insurance product admitted lines coverage, and had to go to the insurer of last resort, which is called the FAIR Plan in California.

And having to be insured by the FAIR Plan implies much higher costs.

And it can also be more challenging, just in general to get coverage.

But what's happened recently is that some of the largest insurers are deciding that they don't want to sell new policies, not just to people that live in high-risk areas, but anyone in California.

They're essentially trying to reduce their overall exposure to the state as a whole.

And that's a major change.

WILLIAM BRANGHAM: Right, major change indeed.

I have long heard environmentalists and other climate risk modelers say that insurance can be a useful tool for trying to get people to live in safer areas and avoid riskier areas, and to get policymakers to focus on the risks of climate change.

Is that, in part, what is happening here?

MICHAEL WARA: Well, California has been a leader in investing in wildfire risk reduction, and over the last several years.

And I think we deserve credit, and that the state policymakers that have led that effort deserve a lot of credit for that.

But we still have much more to do.

I don't think we're at the point yet where anyone would ask people to leave their homes because of wildfire risk.

But the reality is that it is getting more expensive to live in riskier places in California.

And at the margin, that may induce some people to leave those places.

It may make it less -- it may make the homes in those places slightly less valuable.

There's some developing evidence that that is occurring in California as well.

But I think we're far from a place where we would, say, walk away from a community.

And I think there's a lot more to do to reduce risk in and around communities in California before we would take that rather drastic step.

WILLIAM BRANGHAM: What do you see as the trajectory going forward here?

I mean, you have got this -- you were describing a regulatory issue here that needs to be addressed.

But do you think that costs are going to keep going up and it's going to become tighter and tighter for homeowners going forward?

MICHAEL WARA: I do think that insurance costs overall in California are going to continue to increase.

We're still adjusting to the emergence of this catastrophic risk of wildfire in California.

And the insurance system is not fully adjusted to that risk yet.

So, we should expect prices to increase now, it's important for your viewers to understand that in -- home insurance costs in California are actually relatively low, still, by national standards.

And that's because of the tight regulatory framework we have here.

So, we're going to need to allow prices to adjust gradually upward in a way that doesn't cause shocks for homeowners and household budgets, but that does reflect the growing risks we face in the state.

WILLIAM BRANGHAM: All right, Michael Wara of the Woods Institute for the Environment at Stanford University, thank you so much for being here.

MICHAEL WARA: Thanks for having me on.

I really appreciate the opportunity.