Wildfires disrupt California insurance industry

The balance between homeowners and insurers in California has been disrupted by destructive wildfires in the state, and a new policy announced by lawmakers has led to more divisions.

On Dec 5, California Insurance Commissioner Ricardo Lara announced a one-year mandatory moratorium on non-renewal of insurance policies that prohibits insurers from dropping homeowners who live in or near an area hit by recent wildfires.

Citing a homeowner insurance crisis that "extends beyond wildfire perimeters and impacts residents statewide", the commissioner is also asking insurance companies to voluntarily stop all non-renewals related to wildfire risk statewide until Dec 5, 2020.

"This wildfire insurance crisis has been years in the making, but it is an emergency we must deal with now if we are going to keep the California dream of homeownership from becoming the California nightmare, as an increasing number of homeowners struggle to find coverage," Lara said in a statement.

"I am calling on insurance companies to push the pause button on issuing non-renewals for one year to give breathing room to communities and homeowners while they adapt and mitigate risks, give the legislature time to work on additional lasting solutions, and allow California's insurance market to stabilize," he said.

The new policy will cover at least 800,000 homes around the state affected by the 16 state-declared wildfire disasters, including the Kincade Fire in Sonoma County, the Eagle Fire in Lake County and the Getty Fire in Brentwood, Los Angeles.

Jeffrey Michael, a public policy expert at the University of the Pacific, praised the state government for taking action to protect households, but cautioned that "it's not a significant step in resolving the challenge" that homeowners and insurers face in areas with a high risk of wildfires.

He also spoke of unintended consequences that the moratorium could create for other areas in the state that have high fire risks.

"So the concern is that the state in sort of imposing a moratorium and regulations on the industry, in this way, in certain areas, could make insurers less likely to insure properties in other high fire-risk areas, if they view there to be some regulatory risk in addition to the fire risk of working in those areas," he said.

Rex Frazier, president of the Personal Insurance Federation of California, which represents the state's major personal-line property and casualty companies, said the request for a voluntary statewide moratorium is "problematic".

"The Department of Insurance has a dual role. On the one hand, they attempt to keep rates low. On the other hand, they must keep rates high enough to ensure that insurers can keep their promises to pay claims," he said.

"When rates are artificially low, then insurers must figure out ways to reduce the risk they are covering or else their solvency will be jeopardized. California's average homeowners' insurance premiums are low when compared to the rest of the country."

Vida Hamadani, the owner of Vida Hamadani Insurance Agency in Los Angeles, said it's good that the state is doing something for homeowners, who have taken a financial hit from the fires. For insurance companies, the impact is twofold.

"If no fire happens in the future, the impact is going to be a positive impact. So insurance companies are going to collect the premiums, and do not pay, because no fire happens," she said.

"But the real trauma is that if there's another fire in the area, insurance companies are going to be forced to pay the damages to those policyholders that they were trying to cancel … due to fire hazards, and they were forced not to cancel it, so this is bad for the insurance companies," she added.