When I first read about California and State Farm wanting to get out of the market, it was couched as being about climate change and wildfire. Well, being a native Californian, I thought of downtown San Fran and LA, and Palm Desert and Barstow, and thought “huh, can’t be about wildfire.” I guess insurance companies want to use climate models to set rates.. I’d guess they’d prefer RCP 8.5 as well. I wouldn’t blame them. 1. Scientists tell us, 2. It’s good for business, 3. Let’s go with it!
Anyway, I thought this story was more holistic about the many factors involved, which not surprisingly, has to do with state regulation. The story is from E&E news and isn’t paywalled.
For property insurers, Prop 103 has made it almost impossible to set premiums based on computer models that project future risks including climate impacts, said Mark Sektnan, vice president for state government relations at the American Property Casualty Insurance Association. That’s because Prop 103 requires modeling used by insurers to be made public, which modeling companies want to avoid, Sektnan said.
Instead, insurers are setting rates based on their losses over the preceding 20 years.
“It’s a little bit like driving your car using the rearview mirror when your windshield is right there in front of you,” Sektnan said.
When insurers analyze the past 20 years to set rates, they are not fully capturing recent increases in California’s wildfire risk as climate-driven hotter temperatures have made the state’s forests and grasslands drier and more combustible, experts say.
For example, in the 20 years from 2003 through 2022, wildfires burned an average of 1 million acres a year in California, according to an E&E News analysis of data from the state Department of Forestry and Fire Protection.
But in the six years from 2017 through 2022, California wildfires burned an average of 1.8 million acres a year and destroyed or damaged nearly 51,000 structures in total.
“The problem in California is that the risk is changing pretty quickly, especially if you think over two decades. Two decades is just not fit for the problem,” Wara said.
Nancy Watkins, a California-based principal at Milliman insurance consultants, said the retrospective method “is an extremely simple rate-making model that in practice has totally failed to anticipate the growing risk in California due to factors like housing growth in high-risk areas, vegetation build up, the effect of climate change on longer fire seasons, hotter temperatures, drier air.”
“None of that is factored into a backward-looking formula,” Watkins added.
I don’t know what “making modeling public” entails versus having insurance regulators review the models, but it seems like an area that could lead to a potential lack of trust.