MICHEL MARTIN, HOST:
It's too soon to know just how much damage will eventually result from the fires in the LA area, but it's already extensive. And those fires have hit one of the highest-value areas in the nation. Some of the homes affected cost millions of dollars. And for some in the area, insurance was already hard to get. So how might the fires affect the insurance market going forward? KQED reporter Danielle Venton has been looking into this since. She's with us now to tell us what she's found out. Good morning, Danielle.
DANIELLE VENTON, BYLINE: Good morning.
MARTIN: So to start off, will insurance companies have enough money to pay claims for these losses?
VENTON: Yes. Both the industry and outside experts say, yes, people's claims will be paid for in these fires. Insurance companies often carry insurance themselves through something called reinsurance so that they can cover these kinds of disasters. However, there is some concern that the California FAIR plan is so overextended, so overexposed that it might not have enough in the bank to cover losses. The FAIR plan is the state's insurer of last resort. Most states have some version of this, and it's seen an enormous uptake in this area. That's especially after State Farm dropped 70% of its policies in Pacific Palisades neighborhood last year. The FAIR plan really took up that slack. And the Palisades is one of its most exposed areas in the state. They cover homes there worth collectively about $6 billion.
MARTIN: How much can this FAIR plan afford to lose?
VENTON: Not a ton. Last year, the plan's president said they had about 200 million in the bank and about 2.5 billion in reinsurance. So they can cover on their own just about 2.7 billion.
MARTIN: What happens if the damage from these fires goes over that, as seems possible?
VENTON: Well, other insurance companies will pick up the bill and will pass some of those costs on to customers, effectively sharing the cost with the rest of us. Something like that hasn't happened since the '90s, so it's really not clear what that would look like in California, but the additional costs could be spread out over a number of years, making it easier to absorb. But we really won't know what those costs are - if there are any - until after the damage is all assessed.
MARTIN: So I'm sorry. I apologize if I'm asking you to speculate here, but you've been looking into this. So how could these fires change the insurance market in the state going forward?
VENTON: California has had a real insurance crisis over the past five years with companies pulling back coverage, even leaving the state. And the remaining companies have increased prices a lot, especially in wildfire areas. But the state, just two weeks ago, completed a major overhaul of insurance regulations. These were designed to lure companies back into wanting to write more coverage in the state, and these are the biggest changes in 30 years.
MARTIN: OK, so this just happened, but did they appear to be working?
VENTON: There were some early indications that, yes, companies were interested in these changes. Farmers said they were going to write more policies. Allstate also expressed approval. And the hope was that more competition among businesses would moderate prices, but these fires really threaten that progress. Here's what Michael Wara - he's a climate and energy expert at Stanford University - told me.
MICHAEL WARA: Man, you know, the rate increases we've had, which have been extreme, especially for the people in the high-risk areas - that is a preview at this point of what is to come.
VENTON: And what he's really worried about is if the reinsurance companies - which, you know, the state can't force to stay - if they raise their prices too much, what that might do to the market in California. And of course, you know, that's the insurance company's safety net, and what happens there is still to be seen.
MARTIN: That is KQED's Danielle Venton. Danielle, thank you.
VENTON: Thank you. Transcript provided by NPR, Copyright NPR.
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