FORTUNE OCTOBER/NOVEMBER 2021 133WHAT’S ESPECIALLY TELLING about Califor-
nia’s conundrum is that the Golden State long has been
singularly supportive of charging fees to protect the planet.
State legislators years ago imposed an electric-vehicle
mandate and a cap-and-trade program for greenhouse-
gas emissions that amounts to a tax on carbon—both
examples that other states and nations have followed. The
intensity of today’s fight over wildfire-insurance rates sug-
gests that dinging corporate polluters is, politically speak-
ing, an easier strategy than docking millions of voters.
California’s long tradition of consumer activism makes
it particularly difficult for insurers to raise rates. For one
thing, state law requires insurers to get approval for any
increase from the state insurance commissioner—who,
unlike the chief insurance regulator in most other states, is
elected rather than appointed, rendering the commissioner
particularly attuned to voters’ dissatisfactions. For another,
California law allows anyone to file a legal challenge if an
insurer requests a price increase that averages 7% or more.
But the biggest barrier is a stipulation that the com-
missioner may approve only rate increases that fall within
a price band determined by averaging an insurer’s prior
20 years of fire-related losses. In theory, the backward-
averaging method prevents anomalously light or heavy fire
seasons from whipsawing premiums. But it assumes that
future fire trends will look pretty much like past ones—an
assumption that, as the planet warms, looks increasingly
incorrect. In retrospect, the methodology has perpetu-
ated a false sense that the economics of fire insurance in
California are sound, says Nancy Watkins, a principal and
consulting actuary at Milliman. “Looking behind you says
everything is flat,” she says. “What’s ahead of us is the new
normal of climate change, where the risk is a lot higher.”
How much higher became clear after the one-two punch
of the 2017 and 2018 fire seasons. Starting in earnest in
early 2019, insurers shed clumps of customers whose
properties they deemed unreasonable risks. The nonrenew-
als have been most pronounced in the region stretching
from south of Lake Tahoe to the Oregon border, where from
2018 to 2019 they more than doubled, to 25,508, according
to insurance-department data. But the numbers have risen
across the state. The nonrenewals have enraged homeown-
ers and sparked an outcry from the current insurance com-
missioner, Ricardo Lara. He has issued a series of one-year
moratoriums against nonrenewals for residents of a grow-
ing string of zip codes that California Gov. Gavin Newsom
has declared wildfire disaster areas.
The upshot is evident in the crunch now facing the state’s
last-resort fire-insurance pool, the California FAIR Plan.
Despite its downsides—including its priciness and the fact
that its coverage is limited to $3 million, which is less than
the value of not a few California homes—the FAIR Plan has
grown rapidly both in the number of Californians forced to
use it and in the portion of them who live in high-wildfire-
risk areas. In 2019, the number of policies in the FAIR Planstruggling to adapt to climate-related disasters. Cali-
fornia long has typified two quintessentially American
tensions: the one between populism and profit, and the
one between idolizing nature and building on it. These
long-simmering conflicts are boiling over in a fight over
how much regulators will let the insurance industry jack
up the rates it charges some property owners. Insurance
carriers argue that the state’s regulatory regime doesn’t
reflect economic reality in an era of rising wildfire risk.
In the decade prior to 2018, the average California home-
owner’s total yearly premium—including fire and other
protections—increased just 16%, compared with 42%
nationwide, according to Property Insurance Report, a
trade publication. California’s average homeowner’s pre-
mium in 2018, $1,073, placed California 40th among the
states in premium as a percentage of household income.
Those numbers suggest California consumers have been
shielded from global warming’s economic blows—and
that aligning price with risk could mean jarring price
increases.
Portola
Valley has
banned the
planting
of a
handful of
common
tree species
dubbed
“the
flammable
five.”