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--:-- Noelle King: Like a good neighbor, State Farm is there. Unless you want to own a house in California. You're in good hands with all faith. Not if you want to buy a house in California. State Farm and Allstate recently, to the shock of many, announced they won't insure new homes in the Golden State.
--:-- Ben Christopher: California homeowners didn't get much of a heads up, and so the announcement kind of freaked out a lot of people. Insurance is a risk business, and climate change has made it too risky.
--:-- Noelle King: The main culprit in California, wildfires, is not just a California problem. If you live in the Northeast United States, you've noticed a gray pall and the smell of smoke that's drifting down from fires in Canada.
--:-- Ben Christopher: You can take comfort in the fact that you have homeowners insurance for now. Ahead on Today Explained, are insurance companies finally telling Americans what state and local governments refuse to? That some places in this country have become too risky to live in.
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--:-- Ben Christopher: Didn't know that. While other platforms duct tape tools together, ServiceNow seamlessly unifies people, data, workflows, and AI, connecting every corner of your business. And with AI agents working together autonomously, anyone in any department can focus on the work that matters most.
--:-- Noelle King: I've never met an AI agent. Learn how ServiceNow puts AI to work for people at servicenow.com.
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--:-- Noelle King: It's Today Explained. I'm Noelle King. Ben Christopher writes about California housing for the news site CalMatters. And he tells us that State Farm made its announcement late last month on a Friday afternoon, which if you work in news, you know means it is news you would like to vanish from the radar quickly.
--:-- Ben Christopher: I asked Ben what reason State Farm gave. So State Farm laid out three main reasons it was not doing new business in the California home insurance market. Number one, historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.
--:-- Noelle King: In other words, kind of a toxic combination of all factors. All three of these things, they kind of boil down to the same underlying issue, which is wildfire risk. Wildfire risk.
--:-- Ben Christopher: Okay, explain construction costs outpacing inflation. Why do construction costs matter here?
--:-- Ben Christopher: Yeah, so the high cost of construction makes rebuilding really expensive in California. Rising construction costs are not specifically a California issue. We've heard a lot about inflation and supply chain bottlenecks. There was a run-up in the prices for lumber earlier during the pandemic, but the prices of other raw materials have gone up as well.
--:-- Noelle King: And in California specifically, there is an overall shortage of workers in residential construction. That's one of the many, many, many reasons that building in California is so expensive.
--:-- Ben Christopher: And so construction costs are high in California. But from an insurance company perspective, that's really only an issue if you need to rebuild a bunch of homes all at once, as you would after a big fire.
--:-- Noelle King: After fire. Okay. Growing catastrophe exposure, the second one. You said it's basically wildfires. California does have other problems. Flooding has been an issue over the winter. We saw some of that.
--:-- Ben Christopher: would fires be the sole thing that they're pointing to?
--:-- Ben Christopher: Yeah, fire is the biggie. I mean, everyone knows California has earthquakes where the earthquake state. Right. But fire is the big one.
--:-- Noelle King: The threat of wildfires has grown every year, ripping through forests, scarring hillsides, destroying whole communities. It's the one that's getting much more expensive, much worse.
--:-- Ben Christopher: To put that in perspective, of the top 20 most destructive wildfires in California history in terms of the number of buildings destroyed, 13 of them have been since 2017.
--:-- Noelle King: And then these companies are also citing the reinsurance market, which means what exactly?
--:-- Ben Christopher: Yeah. So reinsurance is just insurance that insurance companies buy for themselves.
--:-- Ben Christopher: Let's say an insurance company is doing business in rural California or in another kind of high-risk area like the Gulf Coast. And all of a sudden, there's a big natural disaster and the company gets hit with tens of thousands of claims all at once.
--:-- Ben Christopher: If they have reinsurance on those policies, that means they don't have to pay out the entire bill. They can pass along some of the cost to this other company.
--:-- Noelle King: And depending on how big the natural disaster is, without reinsurance, that could throw the company into bankruptcy.
--:-- Ben Christopher: So it's a protective measure. The problem is that the people who run reinsurance companies, they read the news too, and they know that California's wildfire problem is not going away anytime soon.
--:-- Ben Christopher: And so the cost of reinsurance has gone up as well, making it much more costly, much more risky for insurance companies to sell insurance in California.
--:-- Noelle King: If I'm a homeowner in California or I plan on moving to California and buying a house, what does this mean for me?
--:-- Ben Christopher: Well, so if you are a homeowner and you have a state farm policy right now or an all-state policy right now, you are good for now.
--:-- Noelle King: So for now, this is a no new customer policy. Insurance companies do renew their policies every year.
--:-- Ben Christopher: Whether this means that State Farm is going to get more picky about who it covers when it comes times to renew, we don't know yet.
--:-- Ben Christopher: But for now, this is just for new customers. State Farm and Allstate are both large companies, kind of household name companies.
--:-- Noelle King: How big a deal is this for people in California? Do they have other choices?
--:-- Ben Christopher: They do, but State Farm is the biggie. They are the biggest player in the state's home insurance market.
--:-- Ben Christopher: As of 2021, which is the last time this data was made public, they had about 20% of the home insurance market in California as market share.
--:-- Noelle King: And that in part why this was seen as such a big deal even though they hardly the first to rethink their exposure level in California
--:-- Ben Christopher: So you had AIG They announced that they were getting out of the California home insurance market entirely last year.
--:-- Noelle King: We mentioned Allstate. They made their announcement last year, although no one really noticed it at the time.
--:-- Ben Christopher: And then really going back to 2017, you've had this more under-the-radar, selective drawdown across California with insurance companies telling customers, particularly in fire-prone areas, that they wouldn't be renewing their policies.
--:-- Noelle King: And that's left many parts of California, in particular rural California, as these kinds of insurance deserts where home insurance policies are just either astronomically expensive or not available at all.
--:-- Ben Christopher: Insurance companies are in business to make money, right? We can all acknowledge that.
--:-- Ben Christopher: Why can't the insurance companies just do what companies normally do when a thing costs them more dearly and raise everybody's premiums?
--:-- Ben Christopher: Yeah, well, they would really like to do that. But California, like a lot of states, has a department of insurance that regulates many insurance markets and has to approve proposed rate increases.
--:-- Ben Christopher: In California, like 10 other states, we elect our insurance commissioner whose job it is to regulate most of the state's insurance markets and to approve any rate increases.
--:-- Noelle King: So all insurance premium hikes in the home insurance market have to go through the state's Department of Insurance.
--:-- Ben Christopher: And particularly as wildfire costs have increased, you've had insurance industry groups complaining that California's commissioner has not allowed them to charge the rates needed to make covering homeowners in California worth it.
--:-- Ben Christopher: Incidentally, State Farm back in February requested an almost 30 percent rate hike that's still pending.
--:-- Noelle King: Consumer groups are saying that State Farm is basically trying to publicly pressure you into approving some of the rate hikes that they were proposing right in the ballpark of about $700 million.
--:-- Ben Christopher: Do you think they're trying to pressure you into approving those?
--:-- Ben Christopher: Absolutely not. Look, we have... People didn't pay attention to that much at the time. Now people are realizing, oh, well, maybe that was an indication of where things were going.
--:-- Noelle King: State Farm didn't mention rate hikes in its announcement when it said that they were pulling back a bit from the California market.
--:-- Ben Christopher: But that's the other side of the equation. We were talking about the different rising costs, but their ability to pass those costs along to customers is pretty restricted.
--:-- Noelle King: Why would these companies put a stop to new insurance policies in the entire state and not just restrict it to the areas where wildfires have been a problem?
--:-- Ben Christopher: There are a couple of possible reasons. So one is, we think of wildfire as this fundamentally rural problem. Increasingly, it's not, both because of development into these wildland areas where wildfire is a risk, and also just because wildfire, as a result of climate change and forest management, is becoming more of a suburban problem.
--:-- Ben Christopher: So the San Francisco Bay Area suburbs, the hills above Oakland, suburban San Diego, the Inland Empire, which is the fastest growing part of the state, these are all places that have seen big destructive fires in recent history.
--:-- Noelle King: The other issue is that since the 1960s, California has had a state-sponsored insurance company of last resort called the Fair Plan.
--:-- Ben Christopher: And the Fair Plan offers really expensive and skimpy coverage. But if you're someone who cannot buy insurance from anywhere else in the state, you can always fall back on the Fair Plan.
--:-- Noelle King: And so now the Fair Plan is saddled with a bunch of the riskiest home insurance policies in the state.
--:-- Ben Christopher: And the question is, if there is a massive wildfire season and the fair plan runs out of money, what happens?
--:-- Ben Christopher: And legally, the answer is the fair plan is funded by putting fees on private insurers that are doing business in California in proportion to their market share.
--:-- Noelle King: So the bigger you are in California, the more you would have to pay to bail out the fair plan.
--:-- Ben Christopher: And if and when that needs to be bailed out, that could be really, really expensive.
--:-- Noelle King: And so that might be another reason that the big players like State Farm would want to pare back its overall exposure in California, not just in the high-risk areas.
--:-- Ben Christopher: California already has a terrible housing shortage by a lot of measures, the worst in the country.
--:-- Noelle King: And I wonder whether the knock-on effect of this over time is that fewer homes get built in California.
--:-- Ben Christopher: Yeah, this doesn't help. Most people need a mortgage to buy a house. Lenders generally don't offer home loans without insurance.
--:-- Noelle King: California actually experienced something like the worst case scenario version of this back in the mid-90s.
--:-- Ben Christopher: We had a big earthquake in Southern California. It struck without any warning. The deadly Northridge earthquake ripped through the Southland while most people were asleep, flattening freeways, bursting gas lines, and squashing buildings.
--:-- Noelle King: Insurance companies decided to stop doing business in California basically all at once, and the entire real estate market just kind of ground to a halt across the state because no one could buy a home, because there wasn't insurance available.
--:-- Ben Christopher: We're not there yet, but we have been seeing this kind of slow-motion version.
--:-- Noelle King: Unfortunately, the solution to this current problem, proposed both by insurance companies but also a lot of independent policy experts, is that insurance companies need to be allowed to charge more commensurate with the increasing risk in California.
--:-- Ben Christopher: But that's not a super appealing option either. As you mentioned, California, it's a really expensive place to buy a home. It's already prohibitively expensive for most people.
--:-- Noelle King: So layering on this new higher cost on top of that is not great for would-be homeowners.
--:-- Ben Christopher: And for an elected insurance commissioner in California, it's really bad politics, too.
--:-- Noelle King: There are some challenges, but we're working on them. And I'm very confident we're going to bring these companies back.
--:-- Ben Christopher: One of the really interesting things here is that the market has now started to move on climate change.
--:-- Ben Christopher: We will no longer insure homes in the state in a way that the state itself is not doing.
--:-- Noelle King: Right. California isn't saying, well, you can't build a home in this wildfire zone. You've just got to find your own insurance.
--:-- Ben Christopher: In America, we do often defer to markets. And I wonder, do you think that this could change or move the needle in a way on how California starts to think about climate change and about what's necessary?
--:-- Ben Christopher: Does the market lead the state in this case?
--:-- Ben Christopher: Yeah to a certain extent that is a possibility here where rather than having a sort of top perhaps more thoughtful policy reconsideration of where development happens in California it is being led simply by the increasing cost of insurance
--:-- Noelle King: That probably not the most desirable or least costly way to manage this change that might be foisted upon the state.
--:-- Ben Christopher: But at the moment, they do seem to be leading this reconsideration of where homes get built.
--:-- Noelle King: You are our man in California for the purposes of this episode. So let me ask you, can you imagine the state of California at some point saying there will be places in this state where people simply cannot have houses?
--:-- Ben Christopher: There was actually a legislative proposal just this year to put new restrictions on where you could develop in what's called the wildland-urban interface, which is basically just rural areas that are at most risk of wildfire while prioritizing development in urban areas.
--:-- Noelle King: The bill died. And so at least for now, it's not a politically feasible proposal to make.
--:-- Ben Christopher: But as wildfires continue to get worse and as insurance costs continue to increase, perhaps that political calculation will change.
--:-- Noelle King: That was Ben Christopher of CalMatters.
--:-- Noelle King: This is not just happening in California because climate change is not just happening in California. Coming up, what managed retreat looks like.
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--:-- Noelle King: Support for Today Explained comes from Built Rewards. These days, it seems like everybody has a rewards program. You swipe your card and you get one cent on the hundred dollars.
--:-- Ben Christopher: But with your rent, frequently, you just pay month after month. You never get anything from it other than that roof over your head.
--:-- Noelle King: Not anymore, says Built Rewards. Built Rewards says it lets you earn points on your rent.
--:-- Ben Christopher: By paying rent through Built, they say you can earn flexible points that can be redeemed toward hundreds of hotels and airlines, perhaps a future rent payment, your next Lyft ride, and so much more.
--:-- Noelle King: Your home isn't just where you sleep, it's your community. And Built wants you to go out and do things in the community.
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--:-- Noelle King: When you're ready to travel, they say Bilt points can be converted to miles or hotel points all around the world.
--:-- Ben Christopher: You can earn points on rent and around your neighborhood wherever you call home by joining Bilt.com slash Explained.
--:-- Noelle King: That's J-O-I-N-B-I-L-T dot com slash Explained.
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--:-- Ben Christopher: Or maybe it's the quality of the items, the amazing selection and the newest trends.
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--:-- Noelle King: I just wanted a policy! It's Today Explained. I'm Noelle King.
--:-- Umair Irfan: My name is Umair Irfan and I'm a science reporter at Vox.
--:-- Noelle King: Okay, so we've just spent a couple minutes talking about California and insurers there, large insurers there saying, we simply won't insure new homes. Are there other parts of this country where insurers have said, nah, not worth it?
--:-- Umair Irfan: Oh, absolutely. And this has been a trend that's been going on for a few years, particularly in coastal states around the Gulf Coast, namely Florida and Louisiana.
--:-- Noelle King: They've seen some of the biggest declines in insurance coverage in recent years.
--:-- Umair Irfan: Insurance is regulated at the state level and regulators have to balance basically the business case for insurance you know how much they pay out versus how much they take in as well as the policy case basically how much people can actually afford to pay.
--:-- Noelle King: And in a lot of cases, you know the insurers are telling the state regulators that they can't balance their books based on the amount of risk that they're facing in coastal areas.
--:-- Umair Irfan: That makes a lot of sense that you know hurricanes particularly in areas like the Gulf Coast are causing a lot more damage.
--:-- Noelle King: And that's because populations are growing in those vulnerable areas.
--:-- Umair Irfan: About 40% of the U.S. population lives in a coastal county. About 80% of the U.S. population lives within 100 miles of a border area.
--:-- Noelle King: So not just direct damage, but indirect costs from lost business and revenue.
--:-- Umair Irfan: Those are big things that are really vulnerable to a lot of climate and disaster linked events.
--:-- Noelle King: And so these insurance companies are just saying that the business landscape is just impossible for them to operate in with the constraints that they're facing.
--:-- Umair Irfan: In the first half of the show, we were talking to Ben Christopher about California's fare plan. If you can't get insurance through anyone else, the fare plan will insure you.
--:-- Noelle King: Do other states have things like that or is it just California?
--:-- Umair Irfan: Several states have developed a system where they have an insurer of last resort. And that's basically what it sounds like.
--:-- Noelle King: If nobody else will provide you a policy, the state will.
--:-- Umair Irfan: The tradeoff, though, is that these are very expensive policies, that they're usually something that a lot of people can't easily afford.
--:-- Noelle King: And they're meant to also serve as a signal that, you know, you're going to have to pay for it because you're facing higher risk.
--:-- Umair Irfan: And maybe buying insurance may not be the best way forward, that you should think about relocating or potentially investing in hardening your infrastructure against things like sea level rise or building a larger defensible perimeter against wildfire.
--:-- Noelle King: But in most states that do have an insurer of last resort, they only insure a tiny fraction of properties.
--:-- Umair Irfan: So it's mostly the people who are most desperate or the people who have the most money who can actually avail themselves of the service.
--:-- Noelle King: It is the nudge thing that's so fascinating to me. It's the state saying, listen, if you can't find another insurer and we're going to charge you up the wazoo, maybe you shouldn't be buying that home.
--:-- Umair Irfan: Maybe you shouldn't be building in that area.
--:-- Noelle King: As opposed to the state simply saying, no, the insurance company says that place is too risky for you to build your retirement home.
--:-- Umair Irfan: Companies won't insure you. We're not going to insure you either. You cannot buy there.
--:-- Noelle King: Has the state ever just said we're shutting it down?
--:-- Umair Irfan: I mean, states have tried, but property developers are a powerful political constituency in most states.
--:-- Noelle King: Several years ago in North Carolina, for instance, they started trying to factor sea level rise into their forecast for coastal damages.
--:-- Umair Irfan: And when they started doing that the insurance rates for coastal properties went up
--:-- Noelle King: In 2012 North Carolina passed a law banning the state from making policy based on predictions of rising ocean levels
--:-- Umair Irfan: And so that raised a lot of consternation and mockery at the time.
--:-- Noelle King: I think this is a brilliant solution. If your science gives you a result that you don't like, pass a law saying that the result is illegal. Problem solved.
--:-- Umair Irfan: But it shows some of the tensions that these regulators and state officials and property developers are all facing right now.
--:-- Noelle King: And similarly, for individual homeowners, like, you know, we try to send a signal, but it's not really easy to pick up stakes and move if your insurance rate goes up.
--:-- Umair Irfan: We've seen more often than not, people just let their insurance coverage lapse.
--:-- Noelle King: We saw that happen last year when the federal national flood insurance program actually started to raise their premiums.
--:-- Umair Irfan: The majority of Florida homeowners who may start seeing huge spikes in their flood insurance rate, 1.7 million Floridians have bought policies through FEMA's National Flood Insurance Program.
--:-- Noelle King: And it's not just impacting waterfront mansions. The number of homeowners basically who said that they couldn't afford the new premiums, they didn't move. They just stopped paying for insurance.
--:-- Umair Irfan: And now if there is a flood, knowing that there's a higher risk of flooding, they're just going to be out of luck if that happens.
--:-- Noelle King: For a time now, it has seemed like the government has ignored the market and said, OK, as in the case with wildfires or floods in some part of the country, we will help.
--:-- Umair Irfan: What do you think this is telling us, that the government is willing to step in where companies won't?
--:-- Umair Irfan: It shows that, again, a tension between the business model and the public interest here.
--:-- Noelle King: The National Flood Insurance Program is a federal program, and that was created because very few private insurers would offer flood insurance at all.
--:-- Umair Irfan: Now, the problem with the federal flood insurance program is that they try to subsidize the rates, but it's not enough to cover their books.
--:-- Noelle King: The flood insurance program has been in debt for a very long time.
--:-- Umair Irfan: Congress wrote down about $16 billion of flood insurance debt in 2017.
--:-- Noelle King: The program still has about $20 billion in debt right now, and they even raised their rates last year, and it's still not enough to cover their books.
--:-- Umair Irfan: Now, the federal government basically has a blank check to continue doing these kinds of things.
--:-- Noelle King: But again, if you're a private insurer and you're looking at billions of dollars in debt, that's not something that you can sustain.
--:-- Noelle King: And so obviously there's something of a public interest and private business mismatch here.
--:-- Noelle King: And it's likely that something has to give.
--:-- Noelle King: A couple of years ago, you wrote a piece for Vox about something called managed retreat.
--:-- Umair Irfan: Can you explain what managed retreat is and how it might fit in here?
--:-- Umair Irfan: Well, managed retreat is this idea that we start pulling back from vulnerable areas, areas that are extremely prone to wildfires, areas that are likely to see a lot of flooding, not just in coastal areas, but maybe along riverbanks, for instance.
--:-- Noelle King: And essentially we try to encourage homeowners to move.
--:-- Umair Irfan: We buy out their properties, compensate them, and try to relocate them to areas that are safer.
--:-- Noelle King: Or for the people that don't move, we help subsidize investments to make them more resilient to things like wildfires and flooding.
--:-- Umair Irfan: The problem is, of course, that it's expensive to do this and also people don't want to move.
--:-- Noelle King: They move to these regions to begin with for a reason, that either the places where they can afford or they value the waterfront property or they enjoy being close to the wilderness areas.
--:-- Umair Irfan: That's sort of the exact selling points that brought them to that area in the first place.
--:-- Noelle King: And it's been a little bit more difficult to do that.
--:-- Noelle King: And so they try to use these nudges, but those nudges can only go so far given the powerful economic forces that force people to stay.
--:-- Noelle King: And so the question then is just like, how do you do this?
--:-- Umair Irfan: Like, I think there's also the equity question that people who can afford to buy homes, especially in these expensive areas, maybe they should be paying for their own resilience.
--:-- Noelle King: They should be paying for their own retreat rather than the taxpayer helping them out here.
--:-- Umair Irfan: But at the same time, people have to live somewhere and it's really hard to find a place that isn't going to be vulnerable to some kind of risk at some point in the future.
--:-- Noelle King: We've seen wildfires in the Midwest this year. We've seen epic dust storms, drought. Arizona recently in Phoenix, they said that they're going to stop development in that area because they're worried about running around of groundwater.
--:-- Umair Irfan: So there are some kinds of backstops, there are some limits to what we can do.
--:-- Noelle King: But the question is, what do you do with the existing property? What do you do with the people who are already living there?
--:-- Umair Irfan: And that is really a big conflict that's brewing.
--:-- Noelle King: It's already starting to happen.
--:-- Noelle King: I mean, in the United States, we do have climate refugees, effectively.
--:-- Umair Irfan: In some of the barrier islands around Louisiana and in the Gulf Coast, Ile de Jean Charles, there's already an indigenous native community that's being federally relocated.
--:-- Noelle King: It is the first federally funded community relocation in the country, brought on by sinking grounds and rising sea levels along Louisiana's disappearing coast in crisis.
--:-- Umair Irfan: They're having some of their property bought up and they're being moved towards areas further inland into other areas.
--:-- Noelle King: We're seeing some of this happening with indigenous communities in the Alaskan barrier islands, but these are, you know, very small piecemeal projects and they're happening to scattered communities.
--:-- Noelle King: We're not seeing the sort of wholesale relocation you would need for protecting a city like Miami, for instance, that's right there on the waterfront.
--:-- Umair Irfan: But we do have some of this process is already underway.
--:-- Noelle King: And obviously, there's a lot of tension there as well.
--:-- Noelle King: I mean, people have a very strong sense of place that you lose that when you're forced to relocate when your home is being swallowed up by water or destroyed in a disaster.
--:-- Umair Irfan: And so there's also this sort of mental health problem here that we also have to deal with, this sort of social dislocation that we're also starting to see as well.
--:-- Noelle King: And we're just beginning to grapple with that.
--:-- Noelle King: That was Vox's Umair Irfan.
--:-- Noelle King: Today's show was produced by Avishai Artsy and edited by Matthew Collette.
--:-- Noelle King: It was fact-checked by Laura Bullard and engineered by Michael Raphael.
--:-- Noelle King: I'm Noelle King. It's Today Explained. Thank you.
