In 2018, Paradise, California experienced the most destructive wildfire in the Golden State’s history. Not only did the historic “Camp Fire” tragically take 85 lives, but 11,000 homes were destroyed. In a slow rebuilding process, 1,400 homes were rebuilt as of 2022, and in 2023, new programs are still being rolled out to restore the Paradise communities.
The catch-22 of conditions that made Camp Fire so severe — dry heat, harsh winds, and lack of rain — was years in the making, ramping up due to global warming. Climate change-fueled drought is only making forests more vulnerable to massive fires, as exhibited by the ‘out-of-control’ wildfires that raged through western Canada earlier this month and are now causing smoke-riddled air across the Canada and northern United States.
Now, as California inches toward the commencement of its annual wildfire season, State Farm, the United States’ largest property and casualty insurance company, is no longer accepting applications for the entire state, and the reason is climate change. AIG exited the state last January and according to ABC10 Allstate also previously pulled out of the state, halting California applications last year so it “can continue to protect current customers," Allstate told to the news organization.
While Allstate did not give a concrete reason for why it ceased applications, State Farm was clear: the reason is natural disasters made more severe by climate change.
As the Bloomington, Illinois-based cooperation wrote in a May 26 press release, State Farm will “cease accepting new applications” in California “including all business and personal lines property and casualty insurance.” The decree went into effect a day later.
As State Farm laid out, the company “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” That catastrophe exposure is wildfires.
In 2018, Camp Fire resulted in $12 billion worth of insurance losses, and when California saw 7,490 wildfires in 2022, an increase from the previous year, paralleled with the hottest-ever heatwave on record in the state, the rise in wildfires due to climate change-fueled heat is hard to miss.
And when one northern wildfire took 100 homes amid a 2022 declared state of emergency, the connection between the climate crisis and insurance companies’ rush to protect their financial assets is even harder to miss.
In fact, as The Guardian reports, in the last six years alone, the Golden State has experienced eight of its largest fires on record, 13 of the top 20 most destructive blazes, and three of the top five deadliest fires.
And as State Farm puts it, while they take “seriously” their “responsibility to manage risk,” and “recognize the Governor’s administration, legislators, and the California Department of Insurance (CDI) for their wildfire loss mitigation efforts,” “it’s necessary to take these actions now to improve the company’s financial strength.”
According to Leslie Scism, a news editor who covers all things insurance-related for the Wall Street Journal, more big insurers could follow and State Farm could take even more drastic measures. “It’s been a long-time coming,” she said in an interview with CBS.
While current State Farm policyholders aren’t affected, nor are those applying for auto insurance, the company “is not committing to stick by those [existing premiums] for any length of time, so we could learn a year or now that it's going to not renew some of those customers,” Scism said. And she’s not the only one speculating that the recent decisions may create a “domino effect” for current policyholders and policies in other states.
“It will have a big impact in the California market because State Farm is the top seller of home policies in California,” she said, noting that it insures about 1 in every 5 homeowners, making this move undoubtedly cause stress in the market.
“So agents are going to have to do a lot of scrambling to find other policies to put homebuyers and other customers into.”
While homebuying in California is on the downturn, the state still has the second-largest real estate market showing that despite the wildfires, people are still California dreamin’.
Nevertheless, according to Scism, State Farm could cause a ripple effect throughout both the industry and California regulation which is consumer-oriented, leaning toward lower prices.
For example, in October 2022, the California Department of Insurance (CDI) approved new regulations aiming to mitigate the impact of wildfires on insurance policies. The regulation, which took effect in January, requires insurers to provide discounts based on a dozen mitigation factors for consumers who take steps to protect their homes and businesses from wildfires.
Startups like Firemaps are popping up to help homeowners create wildfire defense and get discounts, however, there’s been pushback by insurers. One challenge is that these firms lack data.
That’s why San Francisco-based startup, ZestyAI launched what they say is the first AI climate risk model made to help insurance companies comply with the new standards.
Zesty says that its tech creates a full solution for insurers to manage wildfire risk with increased transparency, and fully meet the latest California regulatory requirements.
Previously, Zesty partnered with the insurance firm Farmers to expand coverage in California amid the unstable market, mitigating the conditions of thousands of California residents who were previously ineligible.
Zesty isn’t the only venture using AI, as well as satellites and planes, to attack a problem that continues to plague insurance companies in the era of climate change: data deficiency.
In fact, the lack of detailed, long-term projections demanded by the expansiveness of the climate crisis is why federal agencies are stepping in. Together, the National Oceanic and Atmospheric Administration (NOAA) and the National Science Foundation (NSF) are launching a research center that focuses on bringing climate change data to the insurance industry.
While State Farm’s venture arm invests in similar companies to Zesty like San Francisco-based disaster modeling company Cape Analytics, the insurance giant has still decided it’s done with California.
Still, this isn’t just a California issue, as Florida, North Carolina, Louisiana, Colorado, Oregon, and California have all seen insurers cancel policies or leave the state completely after repeated destructive wildfires, hurricanes, and floods.
According to Lisa Dale, a sustainable development and policy expert at the Columbia Climate School, this impact on California mountain-dwellers may soon be a “wake-up call” for coastal livers as well, as communities prone to flooding could be next. Aside from ushering people out of increasingly less safe areas, it could also have negative environmental justice ramifications.
“Removing access to insurance can potentially offer an unambiguous signal of escalating risk — a clue that might incentivize landowners to make appropriate transformational lifestyle choices to reduce their exposure — but it also leaves lower-income households unprotected. There is no simple solution here, and I’m wary of either celebrating or bemoaning this latest move by State Farm,” she said via Columbia’s State of the Planet publication.
And according to Scism, other insurers may follow suit out of Cali.
“What State Farm did is a very big deal. You’ll probably see other insurers feel like ‘Darn if State Farm can do it, we can do it too,’ so that’s probably what’s ahead, and it’s going to just make it tougher and tougher for home buyers to line up policies,” she said.
This tougher and tougher climate-fueled environment could be where climate “insuretech” comes in.
“We’re on a mission to prevent natural hazards from becoming disasters and push the boundaries of how risks are managed and mitigated. But most importantly, we want to make the world a more resilient and safer place under a changing climate.”
Those are the words of Alejandro Martí, CEO and co-founder of Mitiga Solutions, a climate risk startup based out of Barcelona, Spain. As the company put in a May press release, announcing its recent $14.4 million Series A round, “Global warming is happening at a rate unseen for 10,000 years,” and according to Martí, “Traditional risk management tools that rely on past events to predict the future are no longer sufficient, leaving businesses exposed, assets stranded, and reputations at risk.”
There is a myriad of companies providing direct-to-property owner climate risk modeling and loss coverage for everything from hurricane damage to wildfire destruction. Raincoat, for example, which focuses on climate disasters like hurricanes, plans to build out its instantaneous coverage model to be tailed specifically to wildfires.
Another startup, Kettle, makes, in its words, “hyperaccurate and hyperlocal” predictions about wildfire risk. Reportedly, it successfully predicted the locations of the 14 largest wildfires in California in 2020.
According to the startup, its goal is to “protect the world,” that’s why in addition to selling “affording” reinsurance to insurers and asset insights for capital providers, Kettle makes its AI-powered risk modeling technology available for free to insurers, policymakers, and first responders “to enable better decision making and protect people from climate crises.”
Other startups similar to Kettle include Floodbase, formerly known as Cloud to Street, and Understory, which focus on floods/hurricanes and general climate risk respectively.
But Mitiga is taking a different approach by aiming to help firms and insurance providers get better so they don’t leave pack up and climate-vulnerable regions.
The company is doing this through its risk modeling product and its newest addition: the Climate Risk Score, a climate risk index that uses data, artificial intelligence, and physics to create insights about risks, such as wildfires, and even destruction from volcanos, which is among many natural disasters typical State Farm insurance, for example, doesn’t cover, as well as other “Earth movements” like mudslides and landslides, and flood damage, all of which can be exacerbated by climate change.
Mitiga Risk Modeling (Image Credit: Mitiga Solutions)
That’s why as Martí puts it, they’re working with clients to “quantify uncertainty.”
And with its most recent round, the Spanish company is targeting entities across 20 countries that need to collateralize risk to make the best decisions, like financial institutions, insurance firms, and real estate companies. Of Mitiga’s investors — Kibo Ventures which led the round, and Microsoft Climate Innovation Fund, Faber Ventures, and CREAS Impacto — Nationwide Ventures, the investment arm of the insurance company Nationwide, sticks out.
“Severe weather events are a part of everyday life and impact everyone, no matter where they live or what time of year it is,” Klaus Diem, Chief Risk Officer at Nationwide said in a statement.
“That’s why Nationwide has made a concerted effort to raise awareness about the importance of building fortification. We’re hopeful that Mitiga’s technology and extended experience will give the insurance industry a better understanding of when and where bad weather will strike so we can be better prepared to withstand it.”
The investment comes after a report released in 2021, showed that many of the world’s top insurers aren’t doing enough to assess the impact of climate change, such as wildfires, and help customers prevent losses and mitigate damage. One company at the top of the list was Nationwide.
While insurance companies can’t decide where people build and live, they can get them to understand the risks of their choice and price that risk accordingly, and according to Sean Kevelighan, CEO of the UK-based group ShareAction, which created the report, insurance companies need to get better at getting “people to think about risk when they purchase property.”
That risk more and more has to do with climate, and as the report showed, nearly half of the 70 insurers assessed — including U.S. insurers Allstate, American International Group (AIG), Protective Life Insurance Company, Genworth Financial, and Nationwide — have “poor management” of the material risks and opportunities when it comes to climate change. Fewer than half lack climate policies as a whole.
As Felix Nagrawala, author of the report put it in The Columbus Dispatch, for Nationwide, there’s “Practically nothing there in terms of the management of the massive systemic risks from climate change, biodiversity, and human rights to their investment and underwriting activities.”
Mitiga wants to help Nationwide and other insurers do better.
As Martí said in a recent TechCrunch article, “One of the things that we have seen in the past few years is that climate change is changing, especially, the tails of the distribution, the extreme events — so these massive wildfires that we’re seeing, the floods, the tsunamis, etc. — we’re not seeing these kinds of events and the magnitude of these events represented in those long term distributions,” of traditional risk modeling.
He says this renders the antiquated models of most insurance companies “obsolete” black boxes where the outputting risks don’t add up with the current climate crisis.
Fighting this problem doesn’t end with cool tech or insurance coverage, however – policy must play a role. While the state can’t stop State Farm, Allstate, and other insurers from leaving, there are other actions they can take to scale some of the technologies listed above.
According to Dale “State and local policy-makers should invest in technical and financial support for homeowners to help them fortify themselves."
"Wildfire is inevitable, and for fire-dependent ecosystems, essential. Working to reduce risk from those fires is a task that pre-dates the insurance coverage issue, and those strategies are just as important today as they were last week.”