The recent wildfires in Los Angeles have not only devastated landscapes and communities but have also intensified a growing crisis in the homeowners’ insurance market. Many residents in high-risk areas, such as Pacific Palisades, have found themselves suddenly uninsured, with some reportedly losing coverage just days before the fires struck.
Historically, California’s consumer-friendly regulations kept homeowners’ insurance premiums relatively low, even in wildfire-prone regions. However, the increasing frequency and severity of wildfires have led major insurers like State Farm and Allstate to cancel policies, cease offering new policies in certain areas, or pull out of some states altogether, citing profitability challenges.
This has happened before. A series of fires tore through Northern California in late 2017 and 2018 that left hundreds dead and destroyed thousands of structures. In the end, a $13.5 billion class-action settlement to be paid to the wildfire victims was reached. This $13.5 billion was in addition to a $1 billion agreement with cities, counties, and other public entities, as well as an $11 billion deal with insurers who had already covered claims for the 2017 and 2018 wildfires.
Although there is no replacing some personal items, a settlement is some consolation. The problem is that class-action suits take forever, and other logistical issues and appeals can hang things up even longer. As of now, some claimants from those 2018 wildfires still have not received a dollar from that settlement.
This issue isn’t confined to California. States like Florida and Louisiana are experiencing similar challenges, with insurers withdrawing from high-risk areas due to hurricanes and flooding. In Florida, for instance, homeowners in certain towns have faced skyrocketing premiums or policy cancellations, prompting some to relocate.
One of the reasons cited for the severity of the wildfires in California is that they are difficult for firefighters to battle because fire hydrants are out of water. I live in Arizona and I know people who have left the state over concerns about running out of water. Some speculate about future water wars amongst the southwestern states that rely on the Colorado River. New single-family-home permits have been halted in some areas because of concerns over groundwater depletion, which is where most of the water comes from in some parts of the state.
The implications of this trend are profound. Homeowners in high-risk areas may be forced to rely on state-run insurance pools, which often provide limited coverage at higher costs. For example, the California Fair Access to Insurance Requirements (FAIR) Plan offers minimal basic coverage for those who cannot get coverage from private insurers, leaving homeowners vulnerable to significant financial losses. Some homeowners are being left without coverage or choosing to self-insure, which some cannot afford.
So, how does this affect your retirement? Some of the areas that are being affected are some of the most beautiful and expensive markets in the country. If you live in an area that the insurance market deems to be high-risk, your home is going to lose value immediately because your insurance premiums are going to go up. Things will get really difficult if your home is deemed to be uninsurable. The value will decrease significantly because owning the home will be so much riskier, and also because the pool of potential buyers shrinks significantly since nobody will be able to get a mortgage for your home without homeowner’s insurance.
Imagine you retire to California or Florida, your home is worth $1,000,000, and you also have $1,000,000 in investment assets. If your home is paid off and you and your spouse are both receiving Social Security and another pension, you may be living pretty comfortably. If your homeowner’s insurance policy is cancelled and then your home is washed away or burns down, your financial picture changes significantly. Any planning you had previously done is no longer of any value, and you are going to have to either go back to work or significantly adjust your lifestyle, maybe both.
Whether you are staying in your current home in retirement, or if you will be downsizing and relocating, you should consider if your home will remain insurable in the future. If you find what you think is your dream retirement home, take a look at the Fema Flood Maps, which change over time, and do your due diligence to make sure your dream has a low risk of turning into a nightmare.
As climate change continues to exacerbate natural disasters, the insurability of homes in certain regions is becoming increasingly uncertain. Current and prospective homeowners must now consider the long-term viability of obtaining and maintaining insurance when choosing where to live. Failing to do so could jeopardize their financial stability, as the lack of adequate insurance coverage can lead to devastating and irreparable losses in the event of a disaster.
Climate change and the insurance industry’s response is reshaping real estate markets across the United States. Homeowners and potential buyers must weigh the risks associated with where they live, understanding that the once-assumed safety net of insurance may no longer be guaranteed. Let us help you plan for your future. From the Desert to the Tundra, we are your cross-border retirement experts!
