California wildfires will raise home insurance prices in all states - ForumDaily
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California wildfires push home insurance prices higher in all states

Wildfires in Southern California this month and hurricanes in the southeastern U.S. late last year could lead to higher home insurance rates in the near future, even for those living thousands of miles away from disaster sites, according to CNN.

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Regulators in many states allow insurance companies to raise rates to cover the costs of events that force insurers in other areas to pay. The same goes for the cost of reinsurance, the policies companies buy to limit their exposure to major catastrophes.

(Reinsurance is a process whereby an insurance company (the cedent) transfers part of its risks to another insurance company (the reinsurer). This mechanism helps the insurance company cope with the financial consequences of major disasters (such as natural disasters, epidemics, or large-scale accidents) and reduces its own financial liability. For example, if a company has insured a large number of houses against flooding and it occurs, it may suffer huge losses. To reduce the risk, the company reinsures, i.e. transfers part of its obligations to the reinsurer. In this way, the losses are divided between the insurance and reinsurance companies. - Approx. Ed.)

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“In a world where you have big shocks on a regular basis, you have big cross-subsidies across the country,” said Ishita Sen, a Harvard Business School professor who was part of a team that conducted a 2022 study on the impact of costly disasters on home insurance rates nationally. “History shows that after big fires, other states often end up paying for it.”

The Insurance Information Institute, an insurance industry trade group, disputes the study's findings. It argues that the rate increases are due to insurers assessing rising risks and costs across the country, not because homeowners' monthly premiums in one area are being used to pay for catastrophes in others.

“Rates can’t go up arbitrarily. Insurance is regulated at the state level,” said Loretta Worters, a spokeswoman for the Insurance Information Institute. “If you look at a state like Nebraska, which was mentioned in the study, their rates are aligned with the risk. Nebraska regularly experiences natural disasters like tornadoes, high winds, hail, and wildfires.”

The insurance industry is more regulated than others, with rates only being set within acceptable market limits, and this is done at the state level.

“This is an area that is not regulated at the federal level,” said John Schneier, director of research at CoreLogic. “What one state does can be very different from another.”

Sen and her team's findings support this: Different states allow rates to rise by significantly different amounts based on what insurers provide in costs.

Carmen Belber, executive director of Consumer Watchdog, a public interest group focused on the insurance industry, criticized the industry's response to the study. She said piecemeal regulation leads to high costs for insurance customers.

“In states where regulators are less vigilant, insurers can set whatever prices they want,” she said. “If regulation was tighter across the country, our rates would be lower.”

Schneier believes that cost and risk shifting is inevitable for large national insurers that benefit from serving customers in regions with different risks. Asked what he would say to Midwesterners who pay more because of hurricane risks along the Gulf and Atlantic coasts and wildfires in the West, John Schneier said:

"They can be confident that if their home is destroyed by a tornado or their roof is damaged by a large hailstorm, the insurer will cover the losses."

"It's risk sharing. That's how the insurance industry works," he said.

Frequent strong shocks

It is clear that weather-related disasters are becoming more common.

Five of the seven costliest storms in U.S. history have occurred since 2017, according to the Insurance Information Institute.

The fires currently burning in Southern California could become the third-largest insurance disaster in U.S. history, behind Hurricanes Katrina in 2005 and Ian in 2022, which cost $102 billion and $56 billion in today's dollars, respectively. CoreLogic's latest estimates put the wildfires' estimated insured losses at $35 billion to $45 billion.

The losses from the current fires are on top of those from last year's hurricanes Helen and Milton. In particular, Helen cost private insurers between $6 billion and $11 billion, and Milton, which hit the U.S. just two weeks later, between $13 billion and $22 billion.

In addition, the two storms caused tens of billions of dollars in flood damage, much of it uninsured or covered by the National Flood Insurance Program rather than private insurers.

Thus, the losses from these two storms, combined with those from the recent fires, will result in insurance costs of between $54 billion and $78 billion. The costs of the last four months will ultimately be reflected in insurance rates going forward.

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The frequency of climate-related catastrophes continues to rise, causing home insurance rates to rise by an average of 8,7% a year – faster than overall inflation between 2018 and 2022, according to Treasury Department data released last week.

“Home insurance is one area where many Americans are now directly feeling the financial impacts of climate change,” said Ethan Zindler, climate adviser at the Treasury Department, and concluded:

"Extreme weather events and other climate disasters are now happening more frequently and with greater severity. These weather events and climate disasters do not care what your political views are or whether you believe in climate change."

Read also on ForumDaily:

Extreme snow storm and cold weather hit Texas, parts of Florida and other southern states

Florida Insurance Company Rejects More Than 37 Claims from Hurricanes Helen and Milton

30 Los Angeles residents evacuated due to massive fire: Kamala Harris' home is in the area

In the U.S. California natural disasters Educational program insurance in the USA
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