In May 2023, State Farm announced that it was no longer going to write new home insurance policies in California because of increasing wildfire risk and construction costs. This is an enormous decision, as State Farm is one of the state's largest insurers and is the country's largest insurer by volume. The insurer will stop accepting new applications for homeowners and business policies, but will not make any changes to business already on the books. State Farm is not the only insurer taking such steps, as the growing risk of wildfires and increasing state regulations have made it difficult for insurers to properly rate the exposures.
With the increase in wildfires over the past several years, the move should not be a surprise. At one time there was a wildfire season running from May to December, with peak season in California being July to December. With drought conditions since 2000 creating a megadrought that's the driest 22 years in the past 1200 years, an increase in the number of wildfires should be expected.
Likewise, people have been moving closer to wildfire areas. The wildland urban interface (WUI) is the transition area between developed areas and undeveloped land. People move into this area because it's pretty and they want to be close to nature. Herein lies the rub; being that close to wildland areas increases one's risk of wildfire. According to FEMA, between 2002 and 2016 an average of over 3,000 structures per year were lost to WUI fires in the United States. That's 42,000 structures during that time period. Also, the WUI continues to grow by 2 million acres a year. A map of areas with the largest number of homes in the WUI relative to the total houses in the state can be found here.
This is a serious situation, and one reminiscent of the growth of flood insurance. In 1895, private insurers provided coverage when a property flooded. Over time, as more and more land was developed, people moved into areas more susceptible to flooding, either near rivers and streams or close to the ocean. A number of devastating floods lead to the Flood Control Act of 1917, which was designed to reduce flood damage along the Mississippi, Ohio, and Sacramento rivers. It authorized flood control work outside of the Mississippi Valley and directed local communities to help fund the construction of levees and to maintain them.
Then there was the 1927 Great Mississippi River Flood, which was the most destructive river flood in American history. It started raining in August of 1926 and rains continued on and off until April of 1927. In April, the first levee broke, flooding 175,000 acres of land and sending 1.7 to 2 million cubic feet of water down the Mississippi per second. In the span of ten days one million acres of land was under water to a depth of ten feet. In total, 17 million acres, or 27,000 square miles, were submerged. Hundreds of thousands of people were displaced, between 250 and 500 people were killed, and 137,000 buildings were destroyed.
The destruction led to the development of the Flood Control Act of 1928, which was designed to expand on the earlier 1917 Flood Control Act and bring awareness and advances in flood control. By 1929 however, insurers had abandoned providing coverage for flood losses. Over the next several decades, various acts were created until the 1968 National Flood Insurance Act created the National Flood Insurance Program.
While State Farm's exit from writing new business in California is a far cry from the beginning of a national fire insurance program, there are parallels. People have been continually moving into areas that are increasingly subject to wildfires, and losses are becoming extreme. Insurers are finding it harder to develop premiums that will both be approved by regulators and accurately reflect the necessary premium to provide such coverage. How this progresses over time is anyone's guess, but the more we move into dangerous areas the harder it is for insurers to provide coverage. Because of recent wildfires, Colorado is considering establishing a FAIR plan because insurers are finding it difficult to provide coverage.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.