Not long after the Camp Fire ravaged Paradise, Calif., in November, the coach of the girls’ high school basketball team made a vow. “In my heart of hearts, I know we are going to stick around and help rebuild Paradise and make it a town,” Sheila Craft told ESPN. “We are going to rebuild Paradise around sports.”
It was a bold promise. The fire destroyed an enormous swath of central California, killing 86 people and burning more than 150,000 acres, an area 10 times the size of Manhattan. When the wildfire was done with Paradise, there wasn’t much left of the town of 27,000. The basketball team lost its opening game 56-22 to nearby Chico, but the players were glad to be back on the court.
A more troublesome story lurked behind that game, however. Homeowners trying to recover their losses discovered that a venerable insurance company, Merced Property & Casualty, had closed its doors. Facing claims almost three times greater than its assets of $23 million, a company that had survived the Great Depression and other calamities could not survive the Camp Fire.
All was not lost. The good news was that the California Insurance Guarantee Association (CIGA) backstopped the company, along with other insurers whose losses exceeded their capital. All states have these organizations, to protect consumers whose insurance companies go broke. The bad news is that state law caps the benefits CIGA can pay, so no one really knows the extent of the losses property owners will ultimately get hit with.
If there’s any refrain that comes out of every big natural disaster, it’s this: “We’re going to rebuild, bigger and better than ever.” And if the U.S. government’s national climate assessment in late 2018 is any guide, it’s a refrain we’re likely to hear more often. “More frequent and intense extreme weather and climate-related events” are more likely, the assessment concluded, and these events “are expected to continue to damage infrastructure, ecosystems and social systems.”
But no matter how much people might want to rebuild, they won’t be able to if they don’t have money to cover their losses. More insurance company failures like Merced Property are inevitable. More hits on the aid provided by CIGA and similar state insurance guaranty agencies around the country are certain. Tight state budgets simply won’t be able to cover what insurance companies don’t.
Private insurers have their own strategy for dealing with the problem. They buy “reinsurance” from big multinational giants, such as Munich Reinsurance Company and Swiss Re, mostly unknown to the public but essential to keeping insurers afloat when losses loom. But these companies set standards for what they will reinsure and what premiums they will charge for the coverage, and they aren’t about to put themselves at risk for huge losses by making the standards too low.
So we have two big forces pushing back against the rebuild “bigger and better than ever” slogan: stark limits on what the states will be able to afford, and the certainty that the big private reinsurers will set bright-line limits on what they’ll do. Then there’s a third problem, which is that many homeowners simply don’t buy insurance in the first place. When Hurricane Harvey ravaged Houston, 80 percent of those with damaged homes -- 100,000 homeowners -- didn’t have flood coverage.
That leads to cascading questions. Should homeowners be allowed to rebuild in harm’s way? What standards will insurers insist on to minimize future claims? If homeowners decide not to buy insurance, will government backstop their losses? If government does provide the backstop, why would people buy private insurance? And if public institutions are going to step in, what level should be responsible: local governments, often hit by big losses themselves; state governments, with limited pocketbooks; or the federal government, facing soaring deficits and spiraling disaster losses of its own?
These are daunting questions, and we’re reluctant to ask them. In the middle of catastrophic losses, no one wants to hear that government is going to make it even tougher to rebuild.
Local governments are never eager to force tougher regulations on their residents, either. But pressures on the backstoppers -- the state guaranty agencies and global reinsurance companies -- might give them no choice. Damages are likely to grow and, along with them, risks that the backstoppers will be unwilling to accept.
Some analysts have long argued that relying on market forces would produce the best results -- the most efficient outcome with the least amount of government interference. But that, of course, would require homeowners to play by the increasingly tough rules of the private insurance industry -- and it would require government to resist the temptation to leap in and help those who decide not to buy insurance.
One way or another, big questions are brewing, and no one will be able to escape answering them. But one thing seems certain: rebuilding “bigger and better than ever” is a refrain whose time is past.