Editor-DN
“I think we’re on the brink of a major financial crisis for the insurance industry,” says Daniel Aldrich, director of the university’s Resilience Studies Program and co-director of the Global Resilience Institute.
As firefighters in California continue to battle multiple wildfires around Los Angeles, experts are sounding the alarm about a pending crisis in the insurance industry that will have far-reaching effects on the state’s recovery efforts. – and how homeowners rebuild.
“I think we’re on the brink of a major financial crisis for the insurance industry,” says Daniel Aldrich, a Northeastern professor, director of the university’s resilience studies program and co-director of the Global Resilience Institute.
Initial estimates of insured losses from the Pacific Palisades fire are around $10 billion, reports show. Total losses for Los Angeles are estimated at between $20 billion and $50 billion.
Since 2019, more than 100,000 Californians have been dropped from their insurance carriers as wildfires become more frequent and severe in the region, according to a San Francisco Chronicle analysis.
“What happened in California, is that even before these fires, State Farm and many other insurers there started dropping policyholders, saying — and this was about a year ago now. The point is – that their risks were too high to be resolved in the state,” says Aldrich.
“Just to give you a sense of what that means: Of the state’s 12 largest insurers, at least five have stopped or stopped writing new policies statewide,” Aldrich said. say “That’s a big deal.”
California officials saw the writing on the wall, Aldrich says, and moved last year to modernize their FAIR plan, a government-backed program often referred to as the state’s “insurer of last resort.” .
Established after a series of wildfires in the 1960s, the FAIR plan charges higher rates than private market insurers, and a “maximum payout” policy ($3 million for residential policyholders and $3 million for residential policyholders) rather than a replacement policy. offers $20 million) for trade policies.
There are now nearly 450,000 FAIR insurance policies statewide, more than doubling that number by 2020. According to the Los Angeles Times, every company in the state contributes to the cost of the project. (The Los Angeles Times also reported that the program is “dangerously overextended,” accounting for nearly $300 billion with only $200 million in additional coverage.)
Editor’s Choice
An international relations expert says Trump’s comments about Greenland, Panama and Canada are “unprecedented”. What do they mean for America’s future abroad?
An international relations expert says Trump’s comments about Greenland, Panama and Canada are “unprecedented”. What do they mean for America’s future abroad?
How Yizhi can revolutionize your quantum research computing and STEM education.
How Yizhi can revolutionize your quantum research computing and STEM education.
What is HMPV, a cold-like virus circulating in China?
What is HMPV, a cold-like virus circulating in China?
As a grad student, Northeastern Co-op helps a Bay Area startup develop a device to stop toxic algae blooms.
As a grad student, the Northeastern co-op helps a Bay Area startup develop a device to prevent toxic algal blooms.
From design to reality, how a makerspace is empowering student innovation at Northeastern’s Oakland campus.
From design to reality, how a makerspace is empowering student innovation at Northeastern’s Oakland campus.
Rebuilding will be a challenge.
If loss claims exceed FAIR’s reserves, private insurers still operating in the state will step in to cover the first $1 billion shortfall. But Aldrich notes that, even if the FAIR program is able to reimburse its policyholders, homeowners face an uphill battle to build.
“We’ve had 10,000 homes so far that we know have burned to the ground in the Palisades, at a cost of only paying $3 million per home,” says Aldrich. “Let’s say California FAIR actually manages to pay those insurance policies. The cost of rebuilding would be much more than that $2.5 to $3 million.
Aldrich continues: “Why is that? Because, after a shock, the labor market and materials markets suffer. Many homeowners in the Palisades want to rebuild their homes in the next few years, which means Every contractor will be tapped. That’s what happened in New Orleans after Katrina. So the cost of labor and materials like lumber and steel will go through the roof.
Aldrich says California is bracing for another type of disaster in the coming days.
“As the reality of the loss starts to become clear, we can see some catastrophic failures — both of firms still operating, and even bankruptcies and outright failures,” says Aldrich. “We saw hundreds of local small firms across Louisiana go bankrupt after Katrina simply because they weren’t willing to offer to pay from the loss.”
It should come as no surprise.
Aldrich says there are no easy answers to how to mitigate the effects of these disasters. This begs the question: Should humans start building in such disaster-prone areas?
John Fitzgerald, a professor of public policy and civic affairs at Northeastern University, argues that we shouldn’t.
“It happened that no one should have been surprised,” Fitzgerald says. “No one should be surprised that Miami Beach is flooding all the time. The fact is that we are building in places that we should not have built in the first place.
Northeast Global News, in your inbox.
Sign up for NGN’s daily newsletter for news, discoveries and analysis from around the world.
In the midst of accelerating natural disasters due to climate change, the insurance industry is facing a new reckoning. Insurance rates across the country have increased in response to climate change. Even so, California’s rates have generally been below average compared to states like Florida and Texas.
Last year alone, natural disasters around the world — including earthquakes in Turkey and Syria, and wildfires in Hawaii — resulted in nearly $100 billion in insured losses, according to Reuters.
“It’s human hubris that we can ignore Mother Nature,” says Fitzgerald. “My theory is not about how to rebuild to be more resilient, but how to think about whether there are places where we can’t — or not — rebuild. And the Palisades, in particular, is one of those completely vulnerable areas. That much we know ahead of time.”
