First and foremost, our heartfelt thoughts and prayers are with our neighbors in Los Angeles County impacted by devastating wildfires.

The saying “there but for the grace of God go I” will be an important reminder to help however we can.

But these historic fires will bring another crisis to a boil: insurance markets in California. 

A Jan. 15 Wall Street Journal article reported “a little noticed rule change last year by California’s insurance regulators will likely shift a large chunk of the cost of the Los Angeles wildfires to homeowners across the state,”

Almost everyone in California — or certainly many people they know — have had to deal with homeowners policy cancellations and a stressful search for new coverage in recent years.

Getting a “notice of nonrenewal” strikes fear into any homeowner, and a forced willingness to accept pretty much any kind of coverage from any company at any price.

For many, the California FAIR Plan is their only choice. The FAIR Plan was created after the 1965 Watts riots caused major damage in a concentrated area, causing many insurers to pull out of the market.

The FAIR Plan was intended to be an insurer of last resort, and to cover only a small fraction of homeowners.

But as The Wall Street Journal reported, seven of the 12 biggest home insurers in California have stopped or restricted sales of new policies — and nonrenewed many more — driving more and more homeowners to the FAIR Plan.

Since 2019, more than 100,000 Californians have lost their insurance, according to a San Francisco Chronicle analysis.

Many Santa Barbara County residents are in this boat.

Now for the big news: The California FAIR Plan has an estimated $200 million in cash and $2.52 billion of reinsurance, according to data it reported last year.

CBS News reported estimated costs from the Los Angeles wildfires could total as much as $150 billion. So the $2.52 billion in FAIR Plan assets may only cover a small fraction of their claims.

So, who’s gonna pay the check?

Under the FAIR Plan, regulated insurers agree to bail out the plan if necessary, as the price of doing business in California.

But rule changes made last year by state Insurance Commissioner Ricardo Lara allow the regulated insurers to pass on these assessments to homeowners throughout California.

Yes, folks, that’s us.

Under the new rules, companies can increase customer premiums to cover 50% of the first $1 billion of an assessment and 100% of any amounts above that, subject to state Department of Insurance approval. Click here to read the details. 

CBS News called this “a full-scale financial crisis,” and it’s not just in California but Florida, Hawai‘i, Louisiana, Texas and elsewhere in the country.

It is my belief that the Los Angeles wildfires could result in dramatic — and well overdue — changes to our state’s insurance market.

We first need to understand that insurance is all about risk sharing.

Second, we need to accept the fact that insurance companies must charge sufficient premiums to cover claims — and make a reasonable profit.

Third, we need to acknowledge that climate change (let’s not argue about what caused it) has increased risks, and made them much less predictable.

Finally, not having insurance is not a reasonable option for all but the mega-wealthy who can self-insure.

You cannot get a mortgage if you can’t get insurance and, for most of us, our homes represent a very high percentage of our net worth.

So, insurance companies, regulators, policyholders and likely even local/state/federal governments are going to need to work together to find a solution to this crisis.

While the state Insurance Department’s one-year moratorium on nonrenewals is helpful, it is a little like the Dutch boy putting his finger in the hole in the dike. It’s just a temporary delay of the inevitable. Click here for more information about the moratorium.

In my opinion, the solution is going to require insurance companies to model for these new risks, and charge premiums sufficient to meet claims.

More risk-sharing-amount insurers will be needed to further “spread the risk” through reinsurance.

Policyholders are going to need to take on a greater share of the risk through much higher deductibles and co-insurance, which should help offset higher premium costs.

And governments may have to step-in as “insurers of last resort.” Note that we already have this with FEMA, so it’s honestly not a brand-new idea.

And perhaps most important, we need to look at ways of reducing wildfire risks. Utilities have already begun implementing extreme weather power shutdowns and equipment inspections, with more likely ahead.

But we need to better manage our environments, from making our own homes and neighborhoods more defensible to truly managing our open spaces and forests.

We’re probably going to have to cut down some trees, clear fallen brush and allow more prescribed burns.

We will need to build firebreaks between developed and undeveloped areas. Forests need to be prudently managed like they were years ago to make them healthier and safer.

We need to invest in water infrastructure to better utilize and share this precious resource.

And we will have to make wiser choices about where and how to build. It just does not make sense to put homes in areas that history shows have had natural wildfires for all of time, or been flooded regularly, even though the area has a great view.

We are going to bring in experts from a range of fields, citizens, businesses, insurers, regulators and governments to work together in creating workable solutions. 

So, who’s gonna pay the check?  We all are.