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Three Southern California counties have the nation’s highest wildfire risks – and getting insurance to protect property is getting harder to find.

A report from First Street Foundation says a growing number of Americans are finding it difficult to afford insurance on their homes, a problem only expected to worsen because insurers and lawmakers have underestimated the impact of climate change.

The report said the nation’s top spot for wildfire risk is Riverside County. Its risk equals destruction of 1,612 structures worth $1 billion per year in today’s conditions. That will grow to 2,336 worth $1.5 billion in 30 years.

No. 2 was Los Angeles County with expected annual losses of 1,450 structures worth $1 billion growing to 2,272 worth $1.6 billion in 30 years. Next in teh ranking was San Bernardino County, 801 structures worth $484 million at risk growing to 1,290 worth $768 million in 30 years.

The report says states such as California, Florida and Louisiana – all prone to wildfires and damaging storms and flooding – are likely to see the most dramatic increases in premiums. But the fire that destroyed the Hawaiian community of Lahaina on Aug. 8, as well as the historic flooding that happened in Vermont and Maine in July, are examples of events that could drive up insurance costs for homeowners in other states.

“If you’re not worried, you’re not paying attention,” said Bill Dodd, a California state senator whose district includes the wine-country counties devastated by the LNU Complex fires in 2020.

First Street estimates, factoring climate models into the financial risk of properties in its report, that roughly 39 million properties — roughly a quarter of all homes in the country — are being underpriced for the climate risk to insure those properties.

“Some places may be impacted very minimally, but other places could see massive increases in insurance premiums in the coming years,” said Jeremy Porter, head of climate implications at First Street and a co-author of the report.

First Street, a New York-based non-profit, has been a to-go researcher on the financial implications of climate change for years. Their research is used by Fannie Mae, Bank of America, the Treasury Department and others for understanding the potential risks to properties.

There are several signs that climate change is taking its toll on the insurance industry. The U.S. homeowner’s insurance industry has had three straight years of underwriting losses, according to credit rating agency AM Best. Losses for the first half of 2023 totaled $24.5 billion, which is roughly what was lost in all of 2022.

“(Climate change) is a problem that is already here,” said Todd Bevington, a managing director at the insurance broker VIU by HUB. In his 30 years of doing insurance, he said “I’ve never seen the market turn this quickly or significantly.”

Price of paradise

Skyrocketing insurance costs are a serious concern for the small town of Paradise in Northern California, which was nearly wiped out by a deadly 2018 wildfire that killed 85 people.

Jen Goodlin moved back to her hometown from Colorado with her family in 2020, determined to help in the town’s recovery. They began building on a lot they had purchased, and moved into their new house in October 2022. In July, she was shocked to receive notice that the family’s homeowner insurance premium would be $11,245 — up from $2,500.

“Our insurance agent said, ‘Just be thankful we didn’t drop you,’ and I said, ‘You did, you just dropped me,’” she said.

Goodlin, a former dental hygienist who is now executive director of the nonprofit Rebuild Paradise Foundation, said hundreds, if not thousands, of people are being hit by these rate hikes in a town being built with updated fire-safe building codes and little if any fuel to burn. She knows a homeowner whose premium is now $21,000 for a newly constructed home.

Record numbers of Americans are now insured through state-affiliated “insurers of last resort” like California’s FAIR Plan, or Louisiana or Florida’s Citizens property insurance companies. These programs were designed to insure properties where private insurance companies have refused to insure or the price for private insurance is too expensive.

Goodlin will soon be one of those homeowners. She said she’s in the process of transitioning to the FAIR Plan.

The number of homeowners covered by California’s FAIR Plan was 268,321 in 2021, almost double what it was five years before. That figure has almost certainly increased in the last two years, experts say. In Florida, Citizens Property Insurance Corp. now has 1.4 million homeowners’ policies in effect, nearly triple in five years.

In some cases, policymakers have bound the hands of insurance companies, leading to an underpricing of risk. For example, the most a California insurance company can raise a homeowner’s premium by law each year is 7% without involving a public hearing, a process that most insurers want to avoid. Those policies, along with the increased chance of catastrophic events, have led insurers like State Farm and Allstate to either pull out of the California market or pause underwriting new policies.

As a result, California’s FAIR plan, which was created 50 years ago as a temporary stopgap measure for those impacted by riots and brush fires in the 1960s, is now the only option available to homeowners in some ZIP codes.

“We’ve got to find a way to get insurers to get back into the market, to take people out of the FAIR Plan so that we can reduce the risk there,” Dodd said.

Dodd was one of the key lawmakers trying to negotiate a bill in the final weeks of the state’s legislative session to address the issue. But all sides failed to reach an agreement.

There are likely to be more insurance market failures in the future, Porter said, as more insurers simply refuse to underwrite policies in certain communities or go property by property. Comparisons to the National Flood Insurance Program, which is now $22.5 billion in debt, have become common.

Repricing of risk

Even the backstop programs are buckling under tremendous losses. Louisiana’s insurer of last resort, Citizens, raised its rates for 2023 by 63.1% statewide to cover higher costs.

This summer, reinsurance companies such as Swiss Re and Munich Re raised their property catastrophe reinsurance premiums in the U.S. by an average of 20% to 50%. Reinsurance brokerage firm Guy Carpenter & Co. said it was the highest increase for reinsurance rates since the year after Hurricane Katrina devastated New Orleans and the Gulf Coast.

“It’s a global problem. Virtually every geography is seeing a repricing of risk,” said Lara Mowery, global head of distribution at Guy Carpenter, in an interview.

Reinsurers step in to help cover losses resulting from a catastrophe, so regular insurance companies do not take on all of the risk. In one example of a typical reinsurance contract, a $20 million contract could require the insurance company to cover the first $10 million in claims and the reinsurer to pick up the other $10 million.