The Cost of the LA Fires: Will Insurance Cover the Devastation?

HARI SREENIVASAN: Christiane, thanks. Leslie Kaufman, thanks so much for joining us. You have been tracking the costs associated with natural disasters for so long now, but I mean, regardless of what the final number is, we are expecting the costs from the wildfires in Los Angeles to be the most expensive in US history. Who’s gonna pay for this?

LESLIE KAUFMAN: Well, that’s a very interesting question. It’s gonna be some combination of private insurers, but a lot of public money and a lot of it is not gonna be paid for at all. So it’s going to be a mess as we sort through all of this going forward.

SREENIVASAN: Some part of this is because the homes that are in, say the Pacific Palisades neighborhood or you know, beautiful homes, huge mansions, et cetera, but there are a lot of other people outside of that zone or that zip code who are also affected by a number of the wildfires in Los Angeles who have, you know, what we, and I would call normal middle class homes. Right? So this is gonna be felt by not just the celebrities living in that one area.

KAUFMAN: Oh, it’s gonna be felt very broadly and also, not least of which, there are a hundred thousand people or more on the move. They’ve all gotta get homes. California’s home market was already stretched. I mean, there’s a lot of displacement going on there. It could be for a long time. Governor Gavin Newsom has said he’d like to suspend an environmental review and a bunch of other things that go into construction so people can build back quickly. But we’re still talking years away.

SREENIVASAN: In California over the past few years there have been insurance companies who’ve just been saying, this is not a risk that we, the insurance companies are willing to take anymore, and we’re gonna leave. So what has that done to the market in California?

KAUFMAN: So we have to go back to California, we have to go all the way back to Proposition 103 when California had said, we are not gonna let insurance companies raise our rates too much. And over time, what happened was with climate change, the risks began to change. They became more extreme. We can see that climate change has made drought more common. Fire season happens longer. So what happens was the private insurers began saying, I don’t wanna take this risk anymore. And the result has been an enormous growth of risk, concentrated risk, particularly in the riskiest areas going to the state backed insurance plan of last resort. That’s the California Fair Plan. And this is where you go when you can’t get insurance anywhere else and no one actually wants to go to Fair because the plans aren’t as good as private insurance plans. But sometimes that’s where you end up. And the amount of risk that has gone on the Fair Balance Sheet Fair was meant to be a small program. It is now it’s now by its own estimates, the last public estimates as of last September, it has nearly half a trillion dollars of liability on the books. So it’s a big deal.

SREENIVASAN: So what happens if you are living in one of these areas, you couldn’t get insurance from anybody else, you went to Fair. It seems like this is almost a run on the bank. I mean, when hundreds and hundreds of homeowners are gonna file claims, this is a stress test to put it mildly, but can Fair withstand that?

KAUFMAN: Well the president of Fair, Victoria Roach testified that we were, and she did this last spring, that we were one major event away from an assessment.  And what that means is California Fair Plan does not have enough money on hand to cover all of this. If they were a private insurer, they would go bankrupt, but they’re a public insurer or quasi-public, and that means they have assessment power. We’d use taxes in a different term, but essentially they can go to the insurance companies that are their members and they can go to policy holders and say, we need money, and the way we’re gonna get money is we are going to assess everyone that money. The last time they did it was after the earthquakes in 1990s, it was a lot less money back then. This time we could be talking billions and that will have far reaching repercussions.

SREENIVASAN: And that means that every taxpayer in California will be paying part of this assessment. Right? Not just the people who live in these neighborhoods that were affected or in high risk areas.

KAUFMAN: Well, indirectly, every policy holder could, according to the way this works, is two, the first 2 billion in addition that they have to assess half needs to go to the insurance company, but they’re allowed to pass half of that off to every policy holder property policy holder in the, in the state. So yes, I think there are a lot of people even very far from Palisades who will feel that pain.

SREENIVASAN: Where will the balance of that money come from? I mean, let’s say this assessment is, I don’t know, I guess approved. I mean this, what’s the process for this like? The head affair has to go ask the legislature of California, the insurance commissioner, the governor?

KAUFMAN: The Insurance Commissioner, they asked the insurance commissioner and he has to approve. He has to approve it. Now the problem is that Lara, he’s the insurance commissioner, is an elected official. So you can imagine how you don’t wanna do that, but that money has to come from somewhere. Now half of it’s supposed to come to from the insurance companies already doing business in the state, and they are supposed to pay out in proportion to their market over the last two years. So it’s not just like if you left the state a year ago, you’re safe, you would still have to pay something. But these guys have already said, I mean State Farm, the biggest I insure in California has already said they’re undercapitalized. Do I think they’ll get the money? Yes. Do I think this will create an additional incentive to consider whether you wanna stay in California? Yeah, I think it’ll, it’ll have a lot of insurance companies thinking to themselves they’ve made reforms but not good enough.

SREENIVASAN: What are the effects on a marketplace when more and more private insurers pull out? You’re saying that, well, there are gonna be people who end up going to the insurer of last resort, which is the state of California, but as there are less options out there and there are, more people that are asking for coverage, does that mean the prices for these policies keep going up? Does that mean that there’s just gonna be a lot of people who well choose to live in homes without insurance?

KAUFMAN: So it’s a very compliment– complicated feedback. You cannot, or you’re not supposed to live in a house with a mortgage without insurance, right? If I’m your bank, I want you to have insurance. But I don’t really care about insurance on the house’s value. What I care about is insurance on the mortgage. So the amount you owe me, so let’s say your house is worth a million dollars, but you only owe me 300,000. I’d be okay if you had insurance only for 300,000. What this does is it puts, pushes the risk back onto the mortgage holder. And we’re gonna see a lot of that. We’re gonna see a lot of cases where the mortgage holder has a lot more risk than they thought they did, and is gonna lose a lot of this value. On a more global scale, I think we’re talking about what we as a society wanna pay for in terms of risk.

Adam Schiff, who is just elected senator out in California, has suggested that we nationalize this risk like we nationalized flood risk, that we take something like the national flood insurance program, which is famously always in debt and add other risks to it, essentially taking the risks that we have all over the country and making everyone share a piece of them.

SREENIVASAN: So let’s think about that. So you’ve got wildfire risks in places like California or Colorado or other places along the mountain west, right? You’ve got hurricane risk and wind and flood damage risk, all from Florida all the way up the eastern seaboard. You’ve certainly got flood risk in the river valleys across the United States. There’s very few places in America that don’t have some sort of increased risk, especially with how climate change is affecting the weather. Maybe it’s more tornadoes in Kansas, right? So, where do you stop?

KAUFMAN: Well, that’s gonna be a very interesting question because we are, as a nation and as a world, gonna have to make some choices, we’re gonna have to find places that are less risky and prioritize those and places that are more risky and deprioritize those. Right now Americans have been moving to the very riskiest places. They’re nice, they’re on the coast. So if you look down in Florida, that’s a huge flood and hurricane risk. That market has been growing tremendously. The values along California’s coastline, growing tremendously. So while I agree that there’s probably no place safe from climate change risks and the increased risk of catastrophic weather, we are gonna have to do some more intelligent sorting than we’re doing currently.

SREENIVASAN: Most Americans have seen their insurance premiums go up and a lot of people, they’re upset at the insurance company and say, Oh, you’re just using climate change as an opportunity to price go. Is that a fair critique?

KAUFMAN: Look, I’ll be the last person to defend an insurance company. No one likes to face them or face a claim against them. They haven’t had a lot of very profitable years. It, they are trying to figure it out, but it’s not just price gouging. What insurance companies are supposed to do is communicate risk to you. Now there’s a profit on that. Absolutely. They’re not doing it for their health, but what they’re supposed to do with their prices is communicate risk. And part of what’s driving their prices up is reinsurance. When your insurer, you buy insurance for yourself in case you get a really big something that you can’t cover with cash. Those reinsurers largely do, are not in the United States, and the, as a result, are not regulated by us, and they’ve been raising their prices like crazy. They’re telling us, and we have to hear, that in certain areas. The risk is so bad that you have to pay a different price to live there. And it’s something I think most of us are not ready to hear yet.

SREENIVASAN: So if we had to redraw a map of the United States with the appropriate amount of risk factored into the payments, where is a place where you can have a home with a reasonable mortgage and a reasonable amount of insurance to cover for if you did have a catastrophic loss that you get this money back, I mean, it seems like there’s less and less places where it should be theoretically affordable.

KAUFMAN: Yeah, I think we’re gonna see a lot of people shifting up to that Great Lakes region and places like that. But, you know, it’s not easy to predict. A lot of climate scientists moved to Asheville because they thought, Asheville, North Carolina, ’cause they thought it might be a climate haven. And the last hurricane showed us that it really was anything but. I mean, climate change not only makes the world warmer, it makes weather far less predictable, which is a real problem for insurance companies because they’re all about predicting risk.

SREENIVASAN: Is there anybody that’s doing this well? Whether it’s a state or it’s another country, is there some model that we can look around and say, okay, this is, this is an interesting idea. This is something where we can model this risk appropriately and people can still have insurance?

KAUFMAN: Well, I will say that here in the United States, there’s been huge amounts of effort and money put into models. The question of how we predict it. The reason I think some of that’s not being made public is because a lot of housing value is in places where people have high risk. And if you make that public now, you take away the value of their home. So full transparency has consequences as well. It has consequences not, and not necessarily rich people who have all their value in their homes and don’t wanna be told tomorrow that it’s worth nothing. So in terms of an answer, I think we’re gonna have to think about how we pay people to move out of the poorest areas, whether we can pay them something.

There have been programs like this in New Jersey after Sandy, they had a Blue Acres program that offered to pay people to move out of the riskiest areas and to turn it into parkland, essentially down by the shore. The problem was just one or two people held out and wanted to keep their houses which meant that services still had to be provided for them and that you couldn’t turn the rest into park. So it’s not an easy solution.

SREENIVASAN: And then there’s the lens of politics that this is all gonna come through. We are having these horrible wildfires, hopefully they’re out soon, but in a matter of weeks there’s an entirely different administration with a different political philosophy that’s coming into office. Throw that variable into the mix on how that might affect whether people in Los Angeles get paid back and how much and how fast.

KAUFMAN: So that’s very interesting. The federal government will have control of FEMA – that’s the federal emergency management agency. How generous they choose to be through FEMA will be very important. FEMA is a way a lot of individuals get assistance who don’t have insurance and it’s also the way communities get money to pay back. Biden declared a full federal emergency, whether Trump will do anything to pull back and limit money to a place that has not been politically friendly to him. I do not know. But in general, these republicans and under, Republicans under Trump, have called climate change fraud. So they’re certainly not open to addressing the underlying issue. I think we can say safely that they’re gonna have to address these disasters one by one, which will certainly keep coming no matter what promises politicians made. And until we are eventually forced as a society to think about this as a climate problem, the only way to solve it is to keep the world from getting catastrophically warm.

SREENIVASAN: Would you advise people to rebuild in places like Pacific Palisades or areas that are more prone to wildfires, like in parts of California? Even though that might be the best, easiest place to live, it might have access to everything that you want. If your, you know, your entire livelihood depends on being in this proximity to work or your kids’ school. I mean, this is a tough choice that a lot of families are gonna have to face.

KAUFMAN: It is, and we’ve seen this over and over in places like Florida and also California with wildfires, where people sometimes take two wildfires, two hurricanes before they decide, I can’t do this again. I cannot go through this disruption of my life again. It’s very hard to make a decision to leave a place you love. I don’t mean to minimize it. But I think we will see a lot of people who are leaving, and not only because they choose, but because frankly, their finances don’t allow any other choice.

SREENIVASAN: Leslie Kaufman, the Climate and Environment Reporter from Bloomberg. Thanks so much for joining us.

KAUFMAN: Thank you for having me.