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California does not have a crisis insurance policy

It is understandable that wildfire is at the top of California's legislature this session. Coming to the heels of the 2017 wild season season, which saw $ 13.2 billion in insured losses, the fires in November in November that destroyed paradise have produced $ 12 billion of losses, the easiest fan in state history.

But while there is a strong case for California to take action to mitigate its risk of fire and better prepare for future fire, some risks being defended in Sacramento risk repeating the mistakes that Florida is now starting to regret . Since the State Assembly seems ready to vote for AB 740, it is important to remember how strongly California's fire fighting problem differs from Florida's experience of hurricanes.

Moved by the parish to the third reading on May 28 after unanimous vote of the Assembly's Responsibility and Insurance Committee AB 740, the legislator's intention to create which sponsors call the "California Catastrophic Wildfire Victims Fund" (formerly "Climate Change Disaster Compensation Fund"), which was apparently modeled on Florida Hurricane Catastrophe Fund.

You have to say "obviously" Because exactly how this compensation fund would work remains muddy. If the Florida Cat Fund provides reinsurance cover that all insurance companies operating in the state have to purchase, California's proposed fund hardly provides information on how the fund would be funded and who would receive payments.

The bill's latest draft hides text as explicitly named insurers as one of the fund's intended sources of funding, as well as one of its potential recipients. If previous drafts explained that the fund would be used "to replace insurers, policyholders and local authorities for their losses after a fire caused by climate change or an electricity company", the latest version says that it should be used "to replace victims of their losses after a catastrophic fire escape. "

And while the previous version listed" electric stockpayers, taxpayers and insurance company shareholders "among the fund's expected sources of funding, the modified version offers only the vague assertion that" disastrous California Wildfire Victims Fund should be funded by multiple entities … "

If the goal of these changes is to move away from some proposals that the proposed fund works as part of the state's insurance market, this is a very welcome change. While fires in fires have become devastating, there is no crisis in California's home car insurance market. If legislators want to make sure that insurers continue to provide coverage even if the effects of climate change become more obvious, the most important reforms they can undertake are those that allow risk-based rates.

The same thing does not necessarily apply to California's tool market, where there are signs of significant dislocation. A report issued last month by Govin Newsom recommended that the state make changes to its inverse condemnation and strict responsibility doctrines that hold tools responsible for disasters arising from their equipment, even if there is no result of negligence. That doctrine was a driver of the $ 30 billion in debts Pacific Gas and Electric Co. arising from 201

7 and 2018 fires, which ultimately forced the company and its parent to file for bankruptcy. Later, S & P Global Ratings has downgraded the state's other two major investor-owned tools, Southern California Edison Co. and San Diego Gas & Electric Co., and noted that companies "continue to experience catastrophic fires due to climate change and without adequate regulatory protection due to California's common law application of the legal doctrine of inverse condemnation."

Creating any form Funds to better manage the wilderness exposure of the uses could be a good idea, provided it was structured, like the California Earthquake Authority, in California in such a way that the risk is properly reflected. A securities fund may also, like CEA, benefit from the large capital pools on the global reinsurance market to transfer risks outside of California, rather than forcing government taxpayers to bear the unaffected risk locally. Whether this works in practice depends quite a bit on how it is implemented.

But there is simply no evidence that insurance companies need to participate in such a fund. In the report of the bill, the sponsors note that "the number of homeowners in the urban cross-border interface who complained about political dissatisfaction more than tripled from 2010 to 2016." It's not surprising. The Wildfire risk is correlated with geography, and recent conflicts have undoubtedly led some insurance companies to reconsider their concentrations in wilderness areas. There is only one problem to address if policyholders cannot find someone to insure that risk.

For that proof, we must turn to California's Fair Access to Insurance Requirements (FAIR) Plan. California is one of 30 states that drives FAIR plans to serve consumers who find they cannot get adequate coverage in the market. Another five states sponsor specialized pools for coastal storm risks ("beach plans"). Mississippi, North Carolina and Texas run both FAIR plans and wind pools, while Florida and Louisiana sponsor state insurers operating as both wind pools and FAIR plans.

AB 740's authors see a crisis breach with California's FAIR plan and note in the text of the bill that over the past five years, the number of FAIR plans written in pet animals and wilderness areas has increased from 22 397 policies to 33 898 politicians, corresponding to an increase by 51 percent. "

It is true that California's FAIR plan has grown in recent years, and risk assessments are undoubtedly a major part of it, but it is important to keep growth in perspective. According to Property Insurance Plans Service Office (PIPSO) As of 2017, California's FAIR Plan accounted for just 0.77 percent of the market, rising from 0.66 percent in 2013, but still marking California as one of the smaller FAIR plans in the country.

The California plan has only a fraction of the market share of Florida Citizens Property Insurance Corp., even as the latter's monumental efforts to shrink to a more reasonable size have rightly been raised as a successful success, as the following graphics show, even as California buckles the general shrinking trend in FAIR and Beach plans nationwide, it has only about half the market share of the typical government bond market. [19659002] MARKET SHARE (%) OFF


Moreover, to the extent that the insurers appear less eager to extend coverage to properties in the wilderness – the turbine interface, it is market signals that we should observe, not try to override. Mitigation can be a powerful tool, and property owners and insurance companies rightly take a closer look at expanding zones of defensible space around fire-prevented properties and in view of the area's slope, fuel load and access to properties. Significant improvements in terms of limiting and fire fighting can help keep more properties viable and tamp down the prices that would otherwise be needed.

But according to California's Proposition 103 system, insurance companies lack many of the options that they would need to incorporate these data. For example, they cannot consider changes in the cost of reinsurance in their interest rate subsidies. They are limited in how they can use disaster models and force insurers to rely on historical loss data even where the evidence is overwhelming that future losses will be significantly worse. Already limited in their ability not to renew policies in vulnerable areas, insurers are now heard by state legislators who want to force them to take all coming.

Accepting the reality of climate change necessarily means suffering severe adaptation issues. Market price signals offer a way to make the pain of such adjustments more gradual and enduring. Recent research from Headwaters Economics notes that almost half of all new homes are built in the wild-water-calculated wildland-urban interface. Instead of trying to cover insurance rates through regulation or to shift the capital of insurers and reinsurance companies through a new disaster fund, California lawmakers should allow natural market forces to arrest and reverse the settlement pattern.

There is no crisis in California's homeowners insurance market today. But it will be if we refuse to hear which price signals are trying to tell us a lot.

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