Bloomberg | January 23, 2025
Editorial: California’s Recovery Must Price In the True Cost of Risk
Even before the terrible wildfires in Los Angeles County have been quelled, the dead mourned and evacuees sheltered, California leaders are taking steps to accelerate rebuilding. It’s natural to want to restore what was lost in such a tragedy as quickly as possible. But obscuring the true costs will only exacerbate future climate-fueled natural disasters.
It’s not just Los Angeles. Around the country, rising global temperatures are thought to be making wildfires, hurricanes, floods and droughts more intense and unpredictable. Insurers, paid to be clear-eyed about risks, have responded by raising premiums in the most vulnerable areas or, in some cases, pulling out altogether. Such price signals should be respected: Properties that become prohibitively expensive to insure should absolutely lose value.
Instead, politicians have devised ways to keep counterproductive policies artificially affordable. Until last month, California suppressed premium prices by forcing insurers to base their rates on historical data, rather than using models to predict future catastrophe risks. Many have fled the market, leaving the state-sponsored insurer of last resort to absorb an escalating amount of risk. The result: Underpriced insurance from an insurer with precarious finances encouraged homeowners to keep building and living in fire-prone areas.