Climate Change, Wildfire Risk and State Farm’s California Decision

June 1, 2023 by

Several reasons were given within State Farm’s announcement last week the carrier was no longer writing new personal or business property/casualty policies in California – including a challenging reinsurance market, increased risks and historic increases in construction costs outpacing inflation.

However, left out of the much-discussed announcement was the phrase “climate change.”

An immediate response to the decision from the leading property/casualty industry group, which called for higher rates along with other market improvements to deal with increased risks and costs in the state, pointed to wildfires as a major driver of the increased risk.

The California Department of Insurance also responded to the State Farm announcement, citing increased wildfire risks being driven by climate change. Numerous scientific reports have come out in recent years indicating that climate change is driving increased drought conditions and heightened wildfire risks in the Western U.S., particularly California.

Respected catastrophe modeler CoreLogic has for some time said worsening drought conditions related to climate change are exacerbating wildfire risk, and it noted that since the early 20th century, temperatures in the West have increased by 2 degrees Celsius.

Many reinsurers already began recognizing those risks and have reconsidering their business in natural disaster-prone locations like California, where climate change has increased wildfire risks.

A State Farm spokesman asked by a reporter why the company’s statement announcing the decision noted the state’s “rapidly growing catastrophe exposure” but did not mention climate change declined to explain the omission of the still-political phrase.

State Farm has been involved for some time with the American Legislative Exchange Council – a counsel at the company continues holding a seat on the group’s Private Enterprise Advisory Council.

ALEC’s stated goal is to promote a “comprehensive strategy for energy security, production, and distribution in the states consistent with the Jeffersonian principles of free markets and federalism.”

ALEC maintains that global climate change is inevitable, it is a historical phenomenon and “the debate will continue on the significance of natural and anthropogenic contributions.”

Ceres, a climate leadership group, called out ALEC as one of a few groups “encouraging state legislators to support harmful, anti-marketplace policies that take aim at firms considering sustainable investing and climate risk and other financial risks in decision-making.”

Steven M. Rothstein, managing director, Ceres Accelerator for Sustainable Capital Markets, said State Farm’s decision should be viewed as “another example of how climate is affecting not only the insurance industry, but all businesses.”

“Last year, the federal government highlighted $165 billion in economic loss due to climate and 3.4 million people lost their homes temporarily or permanently due to climate risks,” Rothstein said. “We hope that every insurer looks at their current portfolio and either has or updates their transition plan. The decision to cease issuing new policies is not a long-term answer. The long-term answer is to find solutions to help our society reduce disasters and be more prepared for the fires and floods that are occurring.”

The number of carriers shunning the risks of California’s homeowners market continues to increase.

Allstate last year paused new homeowners, condo and commercial insurance policies in California. Other large carriers that have announced a reduced appetite for writing California homeowners insurance include American International Group (AIG) and Chubb, according to Fitch Ratings.

Fitch in an analysis this week said State Farm’s announcement “reflects the poor underwriting experience for California homeowners’ writers.”

“The continued retreat of larger insurance carriers from the California residential property insurance market, including State Farm’s announced move to cease adding new homeowners’ policies in the state, signals ongoing regulatory constraints, rising cost inflation and higher catastrophe losses,” Fitch said.

The ratings agency’s analysis keyed on the changing wildfire hazard, historically considered a secondary peril in the P/C industry. However, wildfire in recent years has been a large source of insured losses in California, surpassing previous records for size and total destruction.

Eight of the state’s top 20 wildfires have occurred in the last half-dozen years, burning 8,512 structures, according to the Western Fire Chiefs Association. The top three largest fires – the August Complex fire in 2020, the Dixie fire in 2021, and the Mendocino Complex fire in 2018 – burned a collective 2.45 million acres and destroyed 2,526 structures.

Those losses do not reflect the destruction from the Camp Fire in 2018, because the 153,336-acre blaze doesn’t rank among the state’s largest. However, it was the state’s most destructive and its deadliest. The Butte County fire destroyed 18,804 structures, caused 85 deaths and is considered the year’s the costliest natural disaster at over $16.5 billion.

This increased risk has led insurers to focus on managing risk aggregations and reduce exposure in areas most prone to these catastrophes, Fitch said.

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