Like A Good Neighbor, State Farm Worries Your House In California Will Burn To Cinders

Insurance companies know damn well that climate change is real.

State Farm announced on Friday that it will no longer sell new homeowners insurance policies in the state of California, explaining the move was due to "historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market." The decision doesn't affect already-existing policies, and State Farm will keep selling car insurance in California too.

The company said that it was really great that California's state government has been ramping up efforts at wildfire mitigation, but added that it was "necessary to take these actions now to improve the company’s financial strength," because in the insurance biz, you can't make a profit if there's too much risk that you'll have more policy holders needing payouts than you've taken in through premiums, or if there's insufficient coverage in reinsurance — basically, the insurance that helps insurance companies pay off claims in a catastrophic situation. Sorry, folks, too much risk, and we can't get coverage ourselves.

Update: State Farm didn'tspecifically mention the problem of California cliffside property falling into the ocean (free WaPo gift linky) due to all the freaky weather, but we suppose that would be part of the "catastrophic exposure" they meant.

Follow The Money

We knew this was on the way, because insurance is all about trying to pin down risk, and droughts, increasingly damaging hurricanes, and rising sea levels are all the sorts of things that will catch the attention of insurance companies, which have been saying "Well, actuarily..." about climate for a couple of decades now. Yr Wonkette chirped and keeled over like a coal mine canary about it over a decade ago, and it wasn't new then , either.

As independent journalist and lefty rabblerouser Hamilton Nolan puts it in a must-read piece on the problem,

The insurance industry is going to serve a very useful role in the climate apocalypse. It is going to be the tip of the spear that punches through all of the bullshit of climate denialism once and for all. Indeed, the process is very much underway already. Politicians and oil lobbyists can lie all they want, but their homeowners insurance rates are going up.

Just this spring, the Senate Budget Committee held hearings on the likely destabilization of the insurance biz. Eric Anderson, president of risk management and reinsurance company Aon PLC, testified that climate change has led to "a crisis of confidence around the ability to predict loss," as Scientific American discusses.

Reinsurance companies, which help insurers pay catastrophic losses, “have been withdrawing from high-risk areas, around wildfire and flood in particular,” Andersen [said. ...]

He added, “Just as the U.S. economy was overexposed to mortgage risk in 2008, the economy today is over exposed to climate risk.”

As insurance analysts Talking Heads warned back in 1983, It's a big, risky business. All that blood, better cover that mess. 

The Backup Plan Needs A Backup Plan

As big private insurance companies decide they don't want to insure property in areas that are at greater risk from extreme weather events, homeowners are supposed to be able to fall back on last-resort basic insurance provided by state governments. Called FAIR (Fair Access to Insurance Requirements) plans, they're intended to fill the gaps when private insurers aren't willing to write policies. The problem, of course, is that when FAIR insurance is all that's available, states find themselves in the same dilemma that private insurers do: If there's a major disaster, the states' insurance reserves are going to go plooey too.

Those plans have been badly stressed recently in Florida — thanks to Hurricane Ian, the system was "seriously depleted," and the state may add a surcharge on policyholders if it needs to cover losses from another disaster — and in California, where

the state-run FAIR plan has accumulated a $332 million deficit while it charges premiums that are too low and has limited reinsurance to cover claims from a catastrophic wildfire, Milliman actuary Nancy Watkins told the committee.

“The California FAIR plan is growing unsustainably high,” Watkins said. She noted that the plan can impose an “unlimited assessment” on insurance companies operating in the state if it is unable to pay claims.

More and more people are having to rely on FAIR plans, which have seen a 29 percent increase in policies between 2018 and 2021, according to testimony from Benjamin Keys, a real estate prof at U of Pennsylvania's Wharton business school. As insurers leave markets due to increased climate risks, that's going to "[leave] homeowners with fewer choices, less protection, and more financial distress."

Doom Spiral, Anyone?

 As Nolan explains, that's going to throw real estate and housing into a huge mess, since banks won't write mortgages on property that can't be insured. Nolan dismisses the state-run insurance plans as a "comforting fiction," noting that the damage from Ian came to $100 billion, of which about $60 billion was insured. $100 billion, he points out, is equal to the annual budget for Florida's state government, so just imagine what's likely to happen when insurers just walk away from a largely uninsurable state.

Actually, Nolan has already imagined it. In the pure capitalist model, insurance becomes more and more expensive, and folks who can't afford the premiums will sell and move away. But that only works as long as there are people willing to buy, after which there's a collapse of the market, "because only very rich or very insane people can afford to live there." The massive drop in real estate values guts property taxes, and eventually the whole mess spirals into a financial crash as banks are left with worthless mortgages, and 2008 looks like a hiccup.

Nolan points out, with socialist glee, that this scenario is simply

the free market functioning perfectly!!! This is actually how capitalism is supposed to solve problems. In this scenario, adaptation to climate change is induced by price signals. People are forced to move away from the coasts because it becomes too expensive. This is economically rational. The human pain of this enormous dislocation does not change that fact.

As with Mark Twain's "The War Prayer," that's what advocates of the "free market" are really praying for, even though they know damn well it would be horrifying to live through.

But that's really unlikely, because just as in other financial catastrophes, the insurers, the banks, and the state will all go to Washington DC for a bailout, because capitalism is nice in theory but sucks to actually experience. In this scenario, the big money will be helped, and lots of individuals who thought they were acting responsibly by buying now-worthless insurance will still lose out, since they are in fact small enough to fail.

It's not so much that climate change is going to kill us all. It's just going to kill far more of us than it would if we weren't so devoted to keeping the investor class happy. Maybe we shouldn't let them run things?

Maybe we need some kind of "Ministry for the Future" that would help point things in a more sustainable direction. Remember, our book club meets again Friday to discuss Kim Stanley Robinson's very timely 2020 novel;more on the book club here. 

[ Reuters / State Farm / Scientific American / How Things Work / WaPo (gift link) / Photo:  2021 BLM Fire Employee Photo Contest, Public Domain]

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