State Farm recently announced that it will no longer be offering new insurance policies to homeowners in California. The company made it clear that it no longer made financial sense to continue covering properties in the state due to its growing risk of wildfires, in addition to other challenges.
State Farm is not alone in its departure; nor is California the only state in the red zone. Allstate announced a similar move just a few days ago, as did AIG last year, and insurers are increasingly wary of operating in hurricane-stricken states in the Southeast. As climate change magnifies the risks and impacts of disasters like wildfires, hurricanes, and floods, the insurance industry is being forced to shift strategies.
Do decisions like State Farm’s aid in climate adaptation and moving people out of harm’s way? And what do decisions like this mean for vulnerable communities? Below, two Climate School experts weigh in on these questions and more. Lisa Dale is a lecturer at the Climate School and the co-director of the Undergraduate Program in Sustainable Development. Alex de Sherbinin is a geographer at the Columbia Climate School’s Center for International Earth Science Information Network (CIESIN). Marco Tedesco is a glaciologist at the Climate School’s Lamont-Doherty Earth Observatory.
All three scholars will delve deeper into the challenges of moving people and communities away from climate-related risks at the upcoming Managed Retreat Conference, hosted by Columbia Climate School from June 20 to 23.
How surprising was this move by State Farm?
Marco Tedesco: What is happening [in California] is a “phenomenon” there, but it is the tip of the iceberg of what we expect to see in the future. The model currently used by insurance companies is not sustainable and it fails especially in the case of climate change, where historical information of events is absent, where one single event is sufficient to create enormous damage to people and infrastructures, and where it is difficult to predict both in space and time. Climate change is, among other things, the greatest challenge to the insurance market of these decades.
Lisa Dale: In truth, many people, including me, expected this to happen much sooner, as financial risks from climate change-driven wildfire would seem to be prohibitive for insurance companies. But as the years have gone by and the insurance industry remained in the state — propped up, it should be noted, by California policies that prohibited insurance companies from dropping their customers after a costly blaze — it seemed the risk calculations were not as obvious as they seemed to observers. Now, we can finally point to this decision and observe that insurance companies often do function as real-time brokers of accurate risk. … If State Farm sees a future in California that offers no path to profitability for them, it is a financial reality-check.
Why is this happening now?
Lisa Dale: Climate change has made wildfires more intense, more common, larger, and more costly. Perhaps insurance companies are seeing the writing on the wall, and making a long-term coverage decision based on data-driven predictions about future risk.
How do you think this will change homeowner and/or developer behavior in California?
Alex de Sherbinin: There will probably always be some company willing to insure homeowners in California… for a price. But if multiple insurers pull out, it may trigger some migration out of those areas.
Lisa Dale: I think this decision will have complicated ramifications. By highlighting the risk from wildfire, the insurance industry has effectively waved a red flag over the state and would-be homeowners will surely take notice. Even more compelling is the idea that developers will scale back their plans for building in areas known to be high-risk for wildfire as they anticipate reduced demand from consumers. This type of movement, away from high-risk areas and toward safer terrain, is potentially game-changing. However, we shouldn’t celebrate just yet. The existing housing stock is massive, and millions of people still live in risky areas.
How might this move affect disadvantaged communities?
Lisa Dale: If more insurance companies follow State Farm’s lead, it may become difficult or impossible for existing homeowners to maintain insurance, creating a critical situation for residents. Environmental justice concerns arise if insurance rates overall increase as a result of State Farm’s decision, making life in the mountains only available to the wealthy, and leaving many long-term residents suddenly exposed to the whims of Mother Nature without a safety net.
What else can be done to handle threats like wildfires?
Lisa Dale: Many other risk reduction strategies exist for those living in wildfire-prone areas. Most importantly, private landowners should pursue strategies that modify the layout of their property and the building materials in use, both of which have been proven to reduce risk. Federal land management agencies should address wildfire risks on public land, which takes up nearly half (46%) of the land base in California. State and local policy-makers should invest in technical and financial support for homeowners to help them fortify themselves. Wildfire is inevitable, and for fire-dependent ecosystems, essential. Working to reduce risk from those fires is a task that pre-dates the insurance coverage issue, and those strategies are just as important today as they were last week.
Does this tie into anything you’ll be discussing at the Managed Retreat conference?
Alex de Sherbinin: Yes, we’ll have some sessions focused on issues in California and on fire risk.
Lisa Dale: I have covered wildfire in the American West at the Managed Retreat conference in 2019 and 2021, and have even talked about the role for insurance in that setting. I’m always interested in how policy changes shift incentives for individuals. As insurance companies leave California, will homeowners choose to live in other, equally dangerous locations in neighboring states, creating an undesirable race-to-the-bottom across states seeking to attract new residents? Or will they take the departure of insurance companies as an indicator of high risk that has them re-considering their desire to live in the mountains at all?
What other areas might lose coverage next?
Alex de Sherbinin: I can say that the same has already happened for insurance in Florida. Rates have gone way up and fewer insurers are in the market. The same factors are likely at play, except for different climate risks.
Lisa Dale: Flood zones in America’s southeast coast are only insured today because of the bankrupt National Flood Insurance Program, which requires publicly underwritten insurance be made available to all homeowners in mapped flood zones. Today, the program is in the red, and homeowners are consistently given conflicting information about the risk they face. They may be told that flooding is likely, but if they are able to obtain affordable home insurance, they would understandably find that reassuring. Removing access to coverage would be a wake-up call for coastal residents just as State Farm’s decision is for mountain-dwellers.
Removing access to insurance can potentially offer an unambiguous signal of escalating risk — a clue that might incentivize landowners to make appropriate transformational lifestyle choices to reduce their exposure — but it also leaves lower income households unprotected. There is no simple solution here, and I’m wary of either celebrating or bemoaning this latest move by State Farm.
Are there any other considerations we should be thinking of?
Marco Tedesco: It is important to think not only how to protect homes and people from fires and smoke today, but also how to protect the landscapes that are some of the reasons why people want to live there. … We have an opportunity to reshape the way we think, and approach economic and financial tools in our society that account for nature and people. This is necessary if we want to create new opportunities to grow. Continuing to expect to grab fuel from the same resource over and over to support the current financial model will only bring the depletion of those resources and the saturation of the “system”. In my opinion, a sustainable, nature-inspired and financially novel model is necessary to insure everyone’s future.
The obvious question is whether this will start to chip away at support for politicians who deny climate change.