PD Editorial: U.S. needs a sustainable insurance model

California's insurance crisis is getting worse as bills for the cataclysmic Los Angeles wildfires come due. The FAIR Plan, the state's insurer of last resort, doesn't have enough money to cover its obligations in L.A. That means private insurers and their insured customers must make up a $1 billion gap. This is not a sustainable model for California or the nation.

It was always a possibility that if FAIR exhausted its reserves, it could pass the bill onto insurers. Last year, Insurance Commissioner Ricardo Lara agreed to a deal under which insurance companies could pass half their obligation onto policyholders. No one expected it to happen so soon.

In the coming months, homeowners policyholders will see a one-time charge on their insurance bills. The Insurance Department will issue guidelines on how much each policyholder owes. Most should expect something less than $100.

That stings, especially after premiums have skyrocketed in recent years. Perhaps homeowners can console themselves with the fact that they are helping their fellow Californians recover from a disaster.

Harder to stomach could be future premium increases. Recent reforms allow insurers to incorporate forward-looking catastrophe models when calculating premiums. With climate change, that no doubt will mean insurance will become even more expensive.

When more people cannot afford higher premiums or cannot find an insurer at all, they will turn to FAIR. Then, the next time a major disaster drains FAIR's reserves, there will be even fewer policyholders to subsidize the program.

That is not inevitable, though. If policyholders demand transparency from insurers and regulators, if legislators and state officials scrutinize rate-setting practices closely to ensure that assessments do not fall unfairly on those least able to pay, then insurance could stabilize.

Even if the market does stabilize, the specter of another $1 billion or more FAIR bailout is just a major disaster away. A bold, national alternative is needed.

A federally supported disaster insurance program could spread risk much more broadly, stabilize state-level marketplaces and prevent isolated disasters from snowballing into systemic failures. It could cover catastrophic losses not just from wildfires in California, but also hurricanes in the Southeast, floods in the Mississippi River Basin, tornadoes in the flatlands and blizzards around the Great Lakes.

A critical component of reform in California or a national insurance program will be requiring insurers to factor in what homeowners have done to protect themselves when setting rates. Homeowners who proactively make changes to their property or build in fire-safe ways deserve a break on their premiums.

A recently introduced bipartisan bill in Congress would incentivize those sorts of improvements. The Disaster Resiliency and Coverage Act, sponsored by Reps. Mike Thompson, D-St. Helena, and Doug LaMalfa, R-Richvale, would provide grants and tax credits to people in high-risk areas who harden their properties against disasters. Their colleagues should view that not as more spending but as an investment to reduce the need for disaster relief.

California's insurance crisis is a warning for the entire nation. As extreme weather events become the new norm, the nation must ensure market stability by spreading risk broadly and building for a resilient future.

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