For several years, California has been home to the largest insurance market in the United States (US) and one of the largest in the world. It’s easy to see why this is the case: there’s high demand for insurance companies due, among other reasons, to the pattern of natural disasters in California. From wildfires and earthquakes to floods and storms, such catastrophic events frequently happen in several parts of the large state, leaving billions of Dollars in damages annually in their wake.

As a result, insurance companies have played a major role in enabling individuals, families, and corporations to get back on their feet after severe property losses. It hasn’t been a walk in the park for these firms, especially as the demands for insurance policies might skyrocket after a major incident. And it doesn’t seem things will improve in the short term — because two main issues with natural disasters have not been addressed yet.

Natural Disasters Remain Unpredictable

One of the most disturbing attributes of natural disasters in California is that they happen without warning. Despite heavy academic and industrial work to build technology that predicts their occurrence, the state is not at that level yet. While hurricanes, for instance, can be seen coming long before they occur, the same cannot be said of wildfires that, even worse than their sudden ignition, can spread over wide land spans with unbelievable speed.

Due to the high risk of natural disasters in this region, and their seeming rate of occurrences, landlord insurance packages in California are structured to cover and take care of damages caused by some of these disasters, like wildfires and storms; this, of course, is in addition to covering property damage and liability protection.

However, the standard landlord insurance policy does not cover earthquakes, landslides, mudflows, and floods. Thus, landlords in California may seek additional coverage to cater to these risks. This means that insurance companies can charge higher premiums to their clients to account for such disasters. But it has not stopped such companies from being restrictive with their insurance policies.

They Happen More Frequently

Even worse than the challenge of unpredictable catastrophes is their high frequency year-on-year — and the resulting damages from these repeated occurrences. Take wildfires, which are the most devastating of all of California’s natural disasters. In 2020 and 2021, there were more than 9,000 wildfire incidents in the state, burning millions of acres of land. In fact, scientists posit that wildfire rates have not been this bad since the Euro-American settlement centuries ago.

In such cases, it becomes difficult for insurance companies to meet the sudden increase in insurance claims. Even worse, it could result in net losses for these companies. And when non-admitted insurance firms need more financial means to pay out these claims, policyholders cannot get the coverage required to recuperate.

The Way Forward

With insurance companies gradually reducing their coverage in California, the state government has had to step up in allaying the impact of natural disasters on these firms. For instance, the specific earthquake insurance provided by the California Earthquake Authority (CEA) has freed up private insurance establishments to issue policies for earthquake-based damages. The California FAIR plan also seeks to cover high-risk properties that cannot obtain a policy from other insurance companies.

In the future, it is worth watching how the state will continue to deal with these issues. As scientists and engineers develop technology to handle these natural disasters better, new insurance models will likely emerge that puts less load on the policyholders and the insurance companies.