The current crisis in property insurance merely echoes the financial horrors of the CZU fires worsened by the catastrophic legal environment for rebuilding cherished homes. Leading insurers like Farmers, State Farm and USAA are cutting back on California home insurance and our area is gravely affected by State Farm’s decision to non-renew 30,000 policies—including the author’s.
In sfchronicle.com/california/article/home-insurance-withdraw-19408863.php, the Chronicle clearly mapped non-renewals in the CZU and Campfire. Yet other woodsy areas, luckier lately, are equally risky yet do not fairly share our insurance burdens. Financial planning gives risk management perspectives relevant to all investments and insurance: avoidance, retention, spreading, loss reduction and risk transfer.
Echoing fears of global warming, some argue that we should simply avoid risk by abandoning our Sylvan paradise to pack dense cities tighter. But density concentrates risk instead of spreading risk as we wonder in nature from redwood cathedrals and the hearty pride of independence that come from settling challenging arbors: wilderness made our country with Henry David Thoreau its leading sage and Frank Lloyd Wright the architect of dispersal.
Retention of risk is most appealing to those with mortgages paid who hazard demoralizing life change if fire devours. Are we allowed to blame CZU fires on “acts of God!” or must we embrace costly litigation and insurance prices? But banks require insurance and seize uninsured homes. Perhaps compromise would help: why not require only insurance on fires that burn limited numbers of houses? Wildfire insurance would be an extra, like earthquake or flood insurance, and insurers would return while banks write new mortgages. In abc7.com, Insurance Commissioner Ricardo Lara warns that “overregulate[d]” companies may stop issuing fire insurance as they stopped issuing earthquake insurance.
Certainly, loss prevention and reduction is possible for those who clean gutters and clear brush and garbage from their homes. Go further with thirty feet of defensible space, tempered glass, fire-rated roofing and fireproofed decking. Insurance Commissioner Richard Lara has fairly sought discounts for cautious homeowners.
But Transfer of Risk to companies that gamble on millions of homes lets consumers avoid calamities for affordable premiums. In normal times, I would be assessing policies for adequate replacement value and encouraging umbrella insurance—but the crisis made us stoop to purchase from a state created insurance consortium called the California FAIR Plan. Insurers risk insolvency from forced participation in FAIR Plan as consumers pay dramatically higher premiums.
According to cfpnet.com, “a FAIR Plan spokesperson stated that the average cost of a policy is about $3,200 per year… significantly more than a typical home insurance policy in California, where the average homeowner pays $1,217… as of January 2024.” If insurance costs double or treble, partial exodus will result with financially diminished homes abandoned.
To explain market failure, all must start with Proposition 103 of 1988, which allowed insurance commissioners to reject insurance rate increases when even a few consumers, with witness fees, complained. In the short run, millions got lower rates. The Insurance Information Institute’s “California’s Risk Crisis” argues that underwriting and pricing must be aligned to the costs of risks, best calculated with current data and advanced computer modeling, but that Prop 103 requires pricing based unscientifically on historical data alone. Price controls and inflexible hearings now make forest insurance too costly.
State Farm’s newsroom lamented non-renewals: “This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations.”
Investors must consider economic risks of price changes and political risks of market destruction with the loss of affordable home insurance. So tighten belts and pack away more acorns to meet unexpected disruptions in markets. To preserve competitive home insurance, Ricardo Lara proposes “…streamlining the rate application process, accounting for catastrophe modeling and reinsurance costs in rates.“ Write him if your insurance fails to renew.
Reducing insurance liabilities, lowering reconstruction costs and enabling insurers to bid on mountain policies at rates higher than current rates but lower than Fair Plan should appease insurers and mortgage bankers as SLV residents celebrate life with nature.
“Find the middle way!” say Buddhists.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
