How Wildfire Risks in California Are Affecting Insurance Rates

For decades now, wildfires in California have been par for the course for its residents. These fires are to be expected, but what they did not necessarily see coming is an increase in their own expenditure. The escalating risk of wildfires has led to Allstate increasing insurance rates for homeowners by 34 percent on average. These rates will be going into effect this coming November. 

While the state doesn’t require potential homeowners to have insurance, many mortgage lenders may require some proof of insurance as a loan condition. This has hit Californians hard, especially with it being the biggest premium increase among major carriers in the past three years. Residents of California are loyal to the state and want to continue living there, but now they are forced to pay an actual price for living in wildfire-prone areas. 

All in all, the 34 percent increase will hit about 200,000 households; 5,000 of those may see an increase of as much as 100 percent. The percentage depends on the likelihood of wildfires in each area. Some face an even sharper hike, such as a few residents of Central California’s Mariposa County who are facing a 203 percent increase—with one of its residents even dealing with a 385 percent increase. 

While this is a huge inconvenience for the residents of California, it is not without reason. Allstate faced the risk of financial collapse if they didn't pass the costs onto Californians. The growing intensity of wildfires, driven by climate change, has heightened tensions for everyone involved.

Michael Passman, an Allstate spokesperson, told Bloomberg, “Higher home values and repair costs coupled with more frequent, severe weather led to higher payments to help customers recover, we need to adjust rates to better reflect the cost of protecting our customers.” During negotiations, Allstate committed to offering new wildfire mitigation discounts for homes that are fortified against fire risks. The company also agreed to reveal how much a wildfire risk score contributes to premium costs. The change in rates, including the estimated costs of future wildfires, were identified using complex computer models instead of determining them using past claim data. However, Consumer Watchdog criticized Allstate for failing to disclose the computer model used to calculate surcharges based on wildfire risk. The group initially challenged Allstate's rate increase proposal, demanding the insurer provide more data.

California has long faced an affordability gap in the housing market that is only widening with these insurance hikes. Not only do residents have to deal with increasing rent—and few wage increases—but these hikes will also only push more native Californians out of the state. California's population growth has largely stagnated, with former residents relocating to cities like Austin, Portland, and Phoenix to escape the state's increasingly unlivable conditions. As a result, California's market has reached a crisis point.

Before this recent development, California residents were paying less for homeowners' insurance than the national average and significantly less than other disaster-prone states such as Florida. Before, Florida edged out California in insurance costs with an average of $3,340 a year for a homeowner’s policy compared to California’s $1,300. Florida does have its own fair share of disasters to insure for, considering its consistent hurricanes, but California’s alarming increase in wildfires is very quickly closing the gap in costs. Unfortunately, wildfires will cause even more California residents to vacate and move to more livable areas. For some, these insurance hikes will be the last straw.