No FAIR

Out of approximately 700 homes destroyed in the 2020 Santa Cruz Mountains Lightning Complex Fire, only 95 have been rebuilt and occupied 4 years later, with only 158 more in construction. Nearly two-thirds are not being rebuilt.

A knowledgeable reader took a look at a court filing on the 2020 Santa Cruz Mountains Lightning Complex Fire. The implication for Los Angeles rebuilding its burned out neighborhoods are not pretty. As you will see below, nearly 2/3 of the homes destroyed in the Santa Cruz Mountains conflagration are not being rebuilt. Fewer than 15% have been rebuilt and are now occupied.

We will need to firm this tidbit as more authoritative sources weigh in, but this informed-looking comment on Reddit suggests that most claims will not be paid out in full due to the State of California being the insurer and lacking the capacity to do so. From Reddit:

The issue isn’t insurance companies going bankrupt in California since, as you mentioned, there are virtually no homeowners insurance plans with wildfire coverage that are underwritten by anything other than the California FAIR Plan anymore. The California FAIR Plan is both the underwriter for virtually all of California’s wildfire insurance as well as the guarantee association that is owned/run by the state.

The issue is that the price controls combined with the state pillaging the FAIR Plan’s funds for “other stuff” means that it only has $400 million to cover the losses. This is combined with the fact that California has a potentially >$60 billion budget deficit for 2025 that they don’t know how they’ll fund (the actual deficit isn’t actually known because the state is deliberately excluding certain items from its calculation of it, such as $20 billion that it needs to pay to the Federal Government this year. The deficit is not less than $38 billion with a middle estimate of ~$60 billion. The high estimate is “who knows?”).

The California Department of Insurance’s official plan on how to now “fund” the FAIR Plan’s multibillion dollar exposure is to prevent insurance companies from non-renewing existing plans as of January 9 and to threaten unspecified penalties for insurance companies that don’t retroactively renew policies that were non-renewed in the past few months. That wouldn’t necessarily do much even if it was able to be implemented, never mind that its unconstitutional and has a 0% chance of going through.

Because there’s very few policies written by insurance companies, their exposure is so low that there isn’t really a concern about any of them becoming insolvent. The real issue is that the FAIR Plan is very clearly insolvent, there is no viable mechanism to fund it, and the FAIR Plan itself is supposed to be the entity covering claims against insolvent insurers.

This isn’t a situation that has ever happened in the modern US and no one knows how it’s going to play out.

So everything is like CalPERS.

On top of the elephant-in-the-room “how meager will my insurance payout be?” another big impediment to reconstruction is shortages and inflation. If that’s in play from a major burn more than four years ago, imagine what will happen with the much greater pressure on building supplies with the unheard of scale of Los Angeles reconstruction when that gets going. (...)

The press is already starting to discuss hurdles homeowners whose houses were burnt out face, from insurance payouts being (legitimately) slow due to claims processing being overwhelmed to insurers trying to lowball payouts and policy-holders (and likely regulators and politicians) going to war with insurers, compounded by high odds of widespread underinsurance. High insurance costs would translate into conscious or accidental only-partial coverage.

Readers who are LA-knowledgeable mentioned other impediments to rebuilding. The wealthy Palisades is a family neighborhood. “There’s nothing to go back to: no schools, no grocery stores.” The implication is that families will be strongly inclined to move to functioning communities and may stay there due to not wanting to uproot their kids yet again.

By contrast, in Altadena, which is more middle class, many of the residents are multi-generational. They could not have afforded to buy the homes they lived in and cannot afford to rebuild. Nearly all will be underinsured, particularly in light of the way building costs will be sure to rise as a result of competition for materials and contractors.

Another potential stumbling point is pressure to rezone. For instance, there will be pressure to allow more multi-family housing, the arguments including climate change benefits (lower materials use, cheaper cooling and heating) and arguably faster restoration of housing for if nothing else, the benefit of businesses.

by Yves Smith, Naked Capitalism |  Read more:

Image: Philip Cheung/NYT; Santa Cruz Planning Dept.; YouTube

[ed. It does make you think. Pretty soon it'll be impossible to get disaster insurance of any kind (if it isn't already), so no one is safe even if you're living in the middle of a city. Apparently these 'urban fires' are caused by flaming debris carried at great distances - a sort of chain reaction - not the edge of wilderness type situations one would expect. Another wrinkle (and I'm just speculating here) but usually no insurance company is entirely on the hook. Typically they'll 'reinsure' policies with other insurers (or governments) to spread the risk around - eg. FAIR. That sounds an awful lot like the sub-prime mortgage fiasco we saw where various high-risk loans were 'bundled' and sold off in 'tranches' to banks and investors. Will this be a similar situation, with contagion spreading beyond the insurance industry to other industries as well? We'll see (but, minimum, rates are poised to go skyrocketing - for everybody).  As with the financial crisis, the federal government likely will step in at some point to make sure insurance companies who couldn't get reinsurance don't go bankrupt (but with the bozos coming in, who knows). As for homeowners, well...good luck.]