California Wildfire Updates

I updated a couple beliefs on the basis of these fires.

NEPA is worse than you think

It turns out that it takes years to get approval to do prescribed burns in California. Even mechanical treatment takes over a year to get a NEPA decision. With litigation, the average timeline goes up to 9.4 years. We know how to control fires, but we don’t allow our government to do it.

Some will blame activists, but the way the law works any project can be sued if it doesn’t proactively conduct a very expensive and time-consuming environmental review, which effectively makes it necessary to do so. Ezra Klein has written about this here. Environmental regulation is complex, but there must be a better way to achieve the goal of protecting the environment, while still enabling crucial ecological interventions.

The fire insurance market is broken in Caliofrnia

In 1988, California passed Proposition 103, which required public hearings to raise insurance rates. Naturally that makes it quite difficult to raise rates. Given that fire-prone areas are increasingly expensive to insure, insurers are dropping coverage from customers in these areas. In fact, in Pacific Palisades specifically, thousands of homes were dropped from fire insurance.

Because this is California, there’s even a non-profit grift incolving an organization called Consumer Watchdog that, ironically, profits from contesting rate increases through something called the “intervenor process”. But that’s another story.

There is an “insurer of last resort” called the California FAIR Plan, but it’s almost illiquid. It has about $385M in cash and $2.5B in reinsurance. Its exposure to the current LA fires is in the neighborhood of $24B. In the likely event that it can’t pay out, it will split the remaining costs among all insurers in the state, proportional to market share. Those insurers will then pass this on to their customers in the form of a surcharge, that could reach thousands of dollars. It’s possible this will also drive insurers out of the state (because they don’t want to risk being saddled with this liability), increasing insurance rates everywhere, regardless of fire risk.

Nobody seems concerned about moral hazard

The big problem with having homeowners throughout the state paying out to the wealthy homeowners in fire prone areas, aside from that being highly distributionally regressive, is that it creates a moral hazard. Fire prone areas are constantly being developed and redeveloped. Instead of taking on the risk of negative outcomes, homeowners know they will receive generous insurance payouts in the event of a fire. This means we’ll see more people building in these areas, more fires, more homes destroyed, and more payouts from the homeowners who did not choose dangerous locations to live.

The war on prices

All of this insurance business relates to people’s distrust of prices. Insurance premia could serve as a quantitative indicator of the risk of building and owning homes, if insurance premia were allowed reflected reality. Instead they’re not allowed to adjust, resulting in homes being uninsured or bailed out by the state with all the moral hazard that entails. Relevant book (that I still haven’t yet read) here.

Other things people are talking about.