Tangle - Why are insurers fleeing California?

I’m Isaac Saul, and this is Tangle: an independent, nonpartisan, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum on the news of the day — then “my take.”

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Today's read: 11 minutes.

Matt Lewis.

In the last year, Tangle has cited the work of The Daily Beast's Matt Lewis on at least three occasions under "What the left is saying." Several readers have pushed back on this placement, arguing that Lewis's track record as a conservative should dictate that his writing be included under "What the right is saying." His opinion pieces are mostly critical of Republicans and former President Trump, and he contributes mostly to The Daily Beast, a solidly left outlet. However, his career has centered on conservative advocacy and commentary, and he describes himself as a "center-right critic of American politics.”

Accordingly, we'll include Matt's commentary under “What the right is saying” in future editions. Tangle's policy is to organize arguments based on the ideological history of the pundit, not the publication or specific argument they're making in a given piece, and our categorization of Matt’s heterodox arguments was an oversight.

We wanted to take a moment to explain our editorial decision, and to thank the readers who brought this to our attention. It speaks to the interesting (and fun!) challenge of sussing out the political ideology of writers we cite, and of organizing arguments in this newsletter.

Quick hits.

1. President Joe Biden signed a bill suspending the debt limit for two years, passing it just 48 hours before the Treasury Department's June 5 deadline to avoid defaulting on the debt. (The signing)
2. The U.S. Air Force scrambled F-16 fighter jets to respond to a small aircraft with an unresponsive pilot, causing sonic booms across the Washington D.C. and Virginia area. The plane eventually crashed in the Virginia mountains. (The crash)
3. A Tennessee judge ruled that a state law aimed at barring drag shows was unconstitutional. (The ruling)
4. A Chinese warship came within 150 yards of a U.S. destroyer in the Taiwan Strait on Saturday. (The encounter)
5. Former Vice President Mike Pence, former New Jersey Gov. Chris Christie, and current North Dakota Gov. Doug Burgum are all expected to announce their presidential campaigns this week. (The announcements)

Today's topic.

California home insurers. Last week, State Farm said it would stop selling new insurance policies to homeowners in California as of May 27, citing "historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market."

The decision leaves Californians without one of the largest insurers in the country and the leading provider of homeowners insurance in the state, worsening the problem for residents already struggling to keep up with costly home insurance. Liberty Mutual and Allstate, other prominent homeowners insurance companies, have also left California.

Insurance costs aren’t rising just in California, either. In Louisiana and Florida, several insurers have gone bankrupt in the wake of major floods and hurricanes. Global insurers are facing a difficult road ahead in 2023, as reinsurers (the insurance companies who insure the insurers) have already hiked rates as much as 200%. Those reinsurers have pointed to natural disasters like Hurricane Ian in Florida, losses from conflicts like the war in Ukraine, and rising interest rates as justifications for the hikes.

California, however, faces unique challenges in worsening wildfire seasons and state-specific insurance regulations. It has already had its first major blaze of the season this April, a sign there may be more extreme wildfire activity this summer and fall than usual. It also operates under a "prior approval" insurance system, where rate hikes have to be approved by Ricardo Lara, the state insurance commissioner. The state also operates the California FAIR Plan, a privately run insurance pool designed for high-risk homes.

While some blame climate change and global factors like the war in Ukraine for State Farm’s decision, others say over-regulation in California has tied the hands of insurers on how much they can adjust prices to account for higher risk.

Today, we're going to take a look at some arguments from the left and right about why this is happening, then my take.

What the left is saying.

• Many on the left say the primary issue is climate change, which is causing more wildfires and catastrophic natural events.
• Some note that the issue is not unique to California, and will worsen in other states, too.
• Others argue the proper regulatory response is to start punishing companies that contribute the most to climate change.

The Los Angeles Times editorial board said climate change is making California more expensive.

State Farm deciding it's "too risky and expensive" to sell new policies in the state is bad news, they wrote. "It’s even worse news that State Farm simply publicized what other insurance companies have been doing quietly for several years by refusing to renew policies and pulling out of communities at risk for wildfires." While there are still more than 100 insurers writing new policies, State Farm makes up 21% of the market. "The company’s decision is worrisome because it shows the continued instability in the market for homeowners insurance, which is essential for people to get a mortgage and to protect their assets," the board said.

"It’s another sign that climate change is driving up the already high cost of living in California and lawmakers need to be far more aggressive in building safer communities." Home insurance has risen more steeply in states facing climate-fueled disasters, like Texas and Florida, but California lawmakers need to make it easier to build new housing "within existing communities" rather than force new housing into high fire-risk areas.

In Curbed, Alissa Walker said "California is becoming uninsurable."

"It’s getting too expensive to rebuild homes lost to the state’s increasingly destructive wildfires. And the largest property-insurance company in the country retreating from the country’s largest property-insurance market isn’t just an inconvenience for potential homeowners — it’s a sign of what’s to come," Walker wrote. Wildfires have destroyed 25,000 homes since 2018, driving $11.7 billion of claims in the state. "But even when homeowners manage to avoid the flames, they often emerge from disaster only to learn their properties are no longer covered," Walker wrote.

The state has tried to help by creating its own high-risk insurer or offering stipends to build fire-resistant homes, but "the ultimate solution that would save lives and homes has been a political third rail: The state should simply not allow people to live in high-fire-risk areas in the first place." What happens in California is often a harbinger for the rest of the U.S., and "insuring the uninsurable in the face of increasingly pervasive climate risk will be a challenge everywhere and not just for wildfires."

In The Hill, Stuart Mackintosh said insurers are fleeing states due to climate realities.

"Republican politicians cannot change the climate and related insurance risks, which the firms must factor into their business decisions," Mackintosh said. Six insurers in Florida and eight in Louisiana went broke last year, while parts of Florida and Louisiana will soon become uninsurable. "This is reality-based economics driving sensible commercial decisions." California's weather extremes will not get better, "only worse."

"State attorneys general, if they really care about their constituents’ futures and want to ensure better economic prospects and outcomes, should start suing the worst greenhouse gas polluters, the firms and actors making an increasingly bad situation worse," Mackintosh said. "State attorneys general should be pursuing stringent net-zero goals in their states, not badgering insurers. They should be changing the local rules and regulations, toughening building standards, cutting local and city-level GHG emissions, changing incentives and punishing freeloaders and those who would risk a livable tomorrow for a fast buck today."

What the right is saying.

• Many on the right say the primary issue is California's insurance regulation, not climate change.
• Some argue that wildfires are worsening in California because of poor land management.
• Others say California regulators could solve the problem by changing the state's rules for insurers.

The Wall Street Journal editorial board said "the culprit isn't climate change, as the media claims in parroting Sacramento talking points."

"The cause is the Golden State’s hostile insurance environment," the board said. "State Farm can’t accurately price risk and increase its rates to cover ballooning liabilities. Other property and casualty insurers, including AIG and Chubb, have also been shrinking their California footprint after years of catastrophic wildfires, which are becoming more common owing to drought and decades of poor forest management. Wildfires in 2017 and 2018 wiped out two times the underwriting profits that insurers had accrued over the prior 26 years," but the state insurance commissioner "won't let insurers raise premiums" to account for more risk.

"California is the only state that requires insurers to set premiums based on historical experience," the board said. "That means insurers must base rates on prior decades when wildfires were less frequent and intense, and they can’t consider how drought will increase their future probability. While progressives demand that businesses account for climate change, California’s Democratic leaders won’t let insurers do so. Who are the climate deniers?" With fewer insurers, there is less competition, and more customers will be forced "into a state-established insurer of last resort (backed by insurers) that provides skimpier and more expensive coverage."

In Washington Examiner, Jon Miltimore said the "real reason" State Farm won't sell home insurance anymore is poor land management and state policies.

"California has struggled mightily with wildfires in recent years," but it's a myth that wildfires are at "historic highs" in the United States. "The truth is wildfires are not a serious problem in most parts of the U.S., and it’s not because the climate change gods are fickle, but because these states practice better land management," Miltimore said. "In a 2020 ProPublica article, journalist Elizabeth Weil pointed out that California officials have turned the state into a tinderbox through years of fire suppression."

Property rights also play a role, as roughly 48 million acres are "owned by the federal government, which is so bad at land management that it managed to lose some 15 million acres of public land." The state also has "various price controls that prevent insurers from raising prices to meet surging costs without the written approval of the California Department of Insurance... Many will cling to the theory that climate change is the real culprit. Those who favor this theory should be asked why California is particularly prone to the externalities of climate change."

In The R Street Institute, Steven Greenhut said California's insurance market is burning down.

"In January, I predicted that California’s ‘rigged’ insurance market was careening toward a crisis and leading 'some companies to pull out of the state or, at least, to reduce their activity here,'" Greenhut said, adding that the state's price controls leave consumers more vulnerable to disasters. Yes, "Inflation has boosted rebuilding costs. Wildfire seasons have become more intense, and state officials often say they will get even worse because of climate change. Reinsurance, which is the insurance that insurance companies buy (thus enabling them to write more policies by reducing their capital exposure), has become pricier for a variety of reasons."

But the "real reason" State Farm is leaving is the absurd prior approval insurance system, "and the way recent commissioners have implemented those rules." In a functioning market, "companies compete for customers and set their rates as they choose." The role for insurance regulators is to "ensure insurers pay out legitimate claims," but these policies shift pricing decisions into the political world. "Even Republican insurance commissioners have been reluctant to approve rate hikes."

My take.

• Every now and then, the answer to these debates is "all of the above."
• California has a few unique issues on both the wildfire side and the insurance regulation side.
• Ultimately, though, this problem is going to proliferate in other places where major weather events are most common.

I love reading about debates like this because the answer seems so obvious to me: All of the above. Climate change and ineffective policies are intersecting to create a crisis.

It’s hard to quantify the blame, but when considering root causes, I actually think California's wildfire management and housing policies are every bit as significant as its insurance regulation. The Los Angeles Times editorial board (under "What the left is saying") pointed out that it is still too hard to build new housing in existing communities in California. The result is that builders are developing cheaper land near or in the foothills, which includes forests and grasslands most prone to burning. As they noted: Half of the buildings destroyed by fires over the last 30 years were constructed in this wildland-urban interface. Meanwhile, the state’s cities continue to fall short of housing construction goals.

And, yes, California is very bad at managing its forests. “The pattern is a form of insanity,” journalist Elizabeth Weil wrote in 2020. “We keep doing overzealous fire suppression across California landscapes where the fire poses little risk to people and structures.” Until California starts preemptively burning the organic material on the ground that fuels wildfires, the situation will keep getting worse.

So, California is making it hard to build more housing where people already live and cheaper to build near places that are at risk of wildfires.

Enter the two issues so many writers have focused on. First, regulation. Insurance companies are operating businesses. They need to be able to price their product commensurate with the risk they are taking on, and right now they can't do that. And since State Farm is going to stay in the state (for existing homeowners), they can't come out and attack the state's policies. But you don't have to be an insurance expert to understand the problem: California homes are becoming riskier to insure and costlier to rebuild, so reinsurers are raising rates; but California won’t allow insurance companies to price in those increased risks.

Then there’s climate change. The state prices insurance based on the last 20 years of an insurer's wildfire losses, which means that it can’t model risk as well as the insurance providers.  If droughts and fires are getting worse due to climate change, which they clearly are, the state’s policy prevents it from accounting for how much worse it has been over the last five years, or how bad it could get in the years to come. The irony of the free market adapting to climate change better than California's government is deep.

So, yes: The problem is everything. California’s insurance crisis sits at the intersection of worsening climate-related events, poor state housing policy, ineffective wildfire mitigation, and nonsensical price controls. But many of those factors aren’t unique to California. The risk of more floods, more wildfires, more hurricanes, and more serious versions of each is going to make insuring homes more expensive in cities and states across the country. Lawmakers everywhere should take note of this reality and start preparing their own legislation to address it.

Your questions, answered.

Q: A Vox writer [Peter Kafka] argued there's no evidence "Americans truly want just-the-facts, down-the-middle news, despite their protestations" (article link). What inspires your conviction that people actually want media like Tangle versus feeling good in their echo chambers?

— Thomas from New York, New York

Tangle: It's hard to argue with his point. While Americans say they want "unbiased" or centrist news, the most avid news consumers still gravitate toward the most ideological outlets. They follow opinion writers or pundits they love, and they get their news from sources that are often not shy about their ideological tilt. Like Kafka, I am also skeptical every time I hear of a new media outlet claiming to be "down-the-middle."

My conviction is actually a little different: It isn't that people want unbiased, down-the-middle, and often boring centrist news. It's that they want to feel like they're getting the whole picture, a wide range of arguments, and a real understanding of an issue. I think the Tangle format works because we share a range of opinion pieces paired with a facts-forward neutral-toned explanation of a news event. This allows readers to get everything: Explanatory journalism, editorial opinions, and then the personalization of "My take." All provided with ideological balance in mind.

It's also true that, for various reasons, Republicans tend to trust news outlets a lot less. Consider this: Democrats trust right-leaning news outlets (like The New York Post, The Daily Caller, The Wall Street Journal, and National Review) more than Republicans do. In that sense, I think news outlets have a much bigger challenge winning back the trust of more right-leaning Americans than of Americans as a whole. To me, that's part of the reason chasing only "down the middle" won’t work.

There is a difference between shooting for the center and shooting to represent a wide spectrum of arguments. I suspect the former is much less interesting to most Americans than the latter.

Want to have a question answered in the newsletter? You can reply to this email (it goes straight to my inbox) or fill out this form.

Under the radar.

The New York Times published a new piece titled "Inside the Complicated Reality of Being America's Oldest President." The Times highlights the juxtaposition of Biden's role and his age: One day he is waking in the middle of the night to manage a crisis after a missile strikes Poland; another day he is struggling to remember how many grandchildren he has. One minute he is being complimented by the Republican House Speaker for being "very smart, very tough" on their debt limit deal; the next minute he trips and falls over a sandbag at the Air Force Commencement speech. "Mr. Biden is the chief executive of the world’s most powerful nation and has just embarked on a campaign asking voters to keep him in the White House until age 86." The New York Times has the story.

Numbers.

• 3,560. The number of California buildings destroyed by wildfires in 2019.
• 11,116. The number of California buildings destroyed by wildfires in 2020.
• 772. The number of California buildings destroyed by wildfires in 2022.
• $888. The current average cost of flood insurance for single-family homes nationwide, according to FEMA.
• $1,808. The expected average cost under new, risk-based pricing that is going to be phased in nationally during the coming years, according to FEMA.
• 8 million. The number of acres that have been burned by wildfires in California since 2016.
• $1.35 million. Excluding land, the average cost of building a new home in California.

Dan Stone.

On Friday, we published a subscribers-only interview with behavioral economist Dan Stone about why some Americans hate each other. It got some rave reviews:

• "This is the kind of stuff that makes me think the subscription is worth it."
• "I really appreciate this article, which highlights what seems to be one of the main problems with our current political climate. It helps explain the nastiness and divisiveness that is so disheartening and counterproductive."
• "Outstanding interview filled with lots of pearls."

Thanks for the feedback! You can read it here.

The extras.

• One year ago today we didn't have a newsletter, but I had just written a special edition about my wife.
• The most clicked link in yesterday's newsletter was Senator Cindy Hyde-Smith's post about vaccine injuries.
• Stay the course: If they *had* to cast a vote in the Democratic Primary, 44% of Tangle readers chose to stick with Joe Biden — far and away the number one choice. 27% chose Robert F. Kennedy, Jr., 7% chose Kamala Harris, and 2.5% chose Marianne Williamson. Nearly 20% of readers selected "Other."
• Nothing to do with politics: Kurt Cobain's smashed guitar sold at auction for nearly $600,000.
• Take the poll. Since the insurance situation in California is so complicated, our poll is a little different today. Which factor do you think has the least impact on the insurance crisis? Let us know!

Have a nice day.

A mother-daughter duo who fled Syria are now receiving diplomas (with honors) from William Paterson University in New Jersey. Stani Habiji and her daughter Racha Ahmad fled the Syrian civil war in 2014. Ahmad, who was chosen as the student speaker for her class, said her mom inspired her to pursue her undergraduate degree, as it would help secure her future and allow her to find work after college. “Taking this journey with my mom has been special for both of us,” she said during her speech. Even better, Bassam Ahmad, her father, was able to come from Syria to watch them graduate after staying behind for years to care for his ailing father. The Messenger has the story.

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