The California real estate insurance system is broken.
The same risk transfer from subsidized insurance and expected disaster relief applies to areas prone to hurricanes and floods. Federally subsidized terrorism insurance, popular in Washington and New York City, transfers that risk to taxpayers in rural Iowa.
The Fair Plan must accept all applicants, who more often own homes in disaster-prone areas that regular insurers shun. But the Fair Plan only has $200 million in assets and $2.5 billion in reinsurance. This is insufficient to cover the approximately $6 billion in claims related to the Los Angeles fires.
California may issue a state bond to pay all claims, putting future California taxpayers on the hook, or ask for national disaster assistance that taxpayers across the nation will pay. Disaster relief costs U.S. taxpayers an average of $46 billion per year.
A new rule in 2024 states that Sacramento has another option. The Fair Plan can pay uncovered claims through an extraordinary assessment imposed on private insurers, who agreed to it to keep doing business in California. This cost is then passed directly onto policyholders, including those who made the wise choice to live in low-risk areas throughout the state.
The first $1 billion of the assessment would be split 50 percent with policyholders, and the rest paid entirely by policyholders. So regular homeowners in California could soon see an additional charge on their upcoming bills, which could range from hundreds to thousands of dollars. Small homeowners in inexpensive Bodega, California, are then, in effect, subsidizing multimillion-dollar homes in high-risk Malibu. The Fair Plan doesn’t seem so fair when looked at in this light.
Decreasing subsidies and letting insurance companies return to transparent free market principles to charge higher prices in disaster-prone areas and lower prices in low-risk areas would be a great fix for the broken system. It will discourage building in high-risk areas, encourage building in low-risk areas, and incentivize other risk-mitigation measures, such as fire-resistant building methods.
Removing subsidies and deregulating the insurance industry—which the incoming Trump administration is ideologically predisposed to do—will encourage rates that internalize rather than socialize risk-taking. Rates in low-risk areas could actually decrease as a result.
These higher prices open homes for those most in need due to a nearby job or school and encourage those with more geographic flexibility to move to other regions with less expensive housing. It also gives builders higher future revenues, incentivizing them to move to the area and rebuild Los Angeles.
Instead, state laws are targeting landlords with allegations of “price gouging” when prices rise more than 10 percent in response to an emergency. Like all rent control, this discourages the building of excess units for times of need, and is ultimately arbitrary in that the first eligible person through the real estate office door is more likely to get the below-market rental rather than the person for whom the house is best suited.
Such laws are self-defeating for those who want to provide as much affordable housing as possible because they remove some of the profit motive that drives builders. Highly restrictive building codes and eviction bans in Los Angeles have also decreased the supply of affordable housing. The less a landlord owns his home due to government restrictions, the less responsive he can be to the actual demands of the market, and the less able and willing to risk significant amounts of capital in developing new supply.
