Effects & Lessons from the LA Fires

The images of the widespread damage in Los Angeles are almost too much to comprehend.  This is so eerily reminiscent of what happened in Lahaina - but turned up to 11.  While the amount of lives lost is significantly less, the amount of property damage is significantly higher.

 

Today we’ll explore how the LA Fire Disaster will impact us here in Hawaii, the similarities between the two events, and hopefully some things we can learn from this event as well.

 

Insurance Woes:

California’s homeowners’ insurance system is a mess.  Not unlike what we are experiencing here in Hawaii, many insurance companies have either left the market or are slowly leaving by not renewing existing policies.  Both Hawaii and California have Insurance Commissioners where insurance companies must file their rates annually.  But California residents passed a proposition in 1988 that put a cap on insurance premiums.  It wasn’t a big issue until the state cut back on forest fire mitigation.  That’s a fancy term for managing the forests to remove dead toppled trees, leaves, and dried brush.  Ignoring the management creates a higher likelihood of fires.  Ironically, that’s one of the major contentions surrounding the Lahaina fire - that Kamehameha Schools let their agriculture land go fallow and created a heightened fire risk.  After the horrific 2018 Camp Fire in Butte County, insurance companies reevaluated the risk associated with homes being built in areas abutting forested areas.  But the insurance companies could not raise rates in those higher risk areas because of Proposition 103.

 

If we all take a page from our economic supply and demand handbook, we know that when a cap is placed on the supply side of things, it will result in a shortage.  Insurers, rather than continue writing policies with premiums that wouldn’t offset the risk, decided to quit and leave the California market entirely.

 

Hawaii has faced the same issue in the last 24 months.  We’ve seen our share of properties unable to obtain coverage because they were dropped by their current insurer.  While at times it seems like Hawaii’s political leaders mimic what California does, the two states took different approaches to help those who cannot find an insurer willing to write them a policy.

 

In California they passed the California FAIR Plan.  It is not a government program but is regulated by the state’s Insurance Commissioner.  Every insurance company writing homeowners policies in California must participate.  The insurance companies pool their resources and take turns issuing policies to those that can’t obtain a policy through normal means.  These “policies of last resort” are deemed high risk, and therefore the rates are significantly higher.  The average policy in California last year was $3,200 annually.  The policies only cover loss due to hazard, like fire.  These policies don’t include other portions of one’s regular homeowners’ policy covering theft and liability.  If a homeowner wants that coverage, they must obtain another separate policy.

 

After the Lahaina fire, Governor Green used his executive powers to relaunch the Hawaii Hurricane Relief Fund and another state-funded program to provide insurance for those that can’t find a policy here in Hawaii.  While these programs are in their early infancy, I am concerned that they will never have sufficient funding if Hawaii suffers another multi-billion dollar catastrophic event.

 

The insurance companies that write policies in California are the same as those that write policies in Hawaii.  Those companies also purchase additional insurance themselves, called reinsurance, to protect themselves against catastrophic losses.  Those reinsurance companies are the same source for Hawaii’s reinsurance market.  The losses from this California event will result in higher premiums for us here in Hawaii.

 

 

Those Pesky Power Lines:

What caused the Lahaina fire?  The leading theory is strong winds and live exposed electrical lines snapping, causing dry brush to ignite.  While Lahaina was a very old town that would have made it cost prohibitive to bury the existing power lines, the same wasn’t true in California.

 

California regulators ignored the risks of building in areas susceptible to high winds and near forested areas, yet they continued to allow the use of overhead electrical lines for new home developments.

 

Hawaii has the same myopic approach.  With Lahaina completely destroyed, why would anything other than underground utilities be allowed?  Yet Lahaina is being rebuilt with the same overhead lines as before.

 

It’s about time we in a state that prides itself with beautiful scenery would continue to allow the use and add even more overhead power lines that blights what makes Hawaii a visually amazing place to live.  It’s time we stopped looking like the 3^rd world country.  Not only is the continued use of overhead lines an eyesore, but underground utilities are also far more reliable.

 

Don’t you find it bizarre that instead of HECO looking for ways to make the delivery of this crucial utility more reliable, then instead have instituted a program to shut off the power when the wind kicks up?

 

 

Electric Bills Going Up:

California’s 2018 Camp fire was blamed on power lines.  The settlement cost PG&E billions.  But who is paying for that?  If you guessed anyone other than the customers, you’d be wrong.  California residents now have some of the highest electricity costs in the country – but not as high as Hawaii!

 

Hawaiian Electric Industries, which is a holding company for many businesses, including Hawaiian Electric, just sold 90% of American Savings to raise capital to help pay for damages for their role in the Lahaina fire.  Where’s the rest of the settlement money going to come from?  If you guessed anyone other than us customers, you’d be wrong.  How much will HECO eventually have to pay?  I will discuss that later in this article.

 

 

Accessible Water:

Similar to California, Hawaii has a battle raging over water rights.  In California, 4 dams were recently demolished in a settlement with local American Indian tribes to allow for salmon to migrate upstream.  That loss of water has contributed to the lack of water to fight fires.

 

As for Lahaina, the story was buried, and the truth may never be known, but there was conflict over releasing water held for native Hawaiian farmers use, to fight the Lahaina fire.

 

Both California and Hawaii have areas that experience high rainfall totals, but all that water runs off into the sea, not to be captured.  Here at home, we should look at the possibility of capturing that water for storage and non-potable use, to give our aquafers some help.

 

 

Tax Impact:

The reports that California’s state and county governments ignored warnings such as clearing forested areas and that there was insufficient water to handle the fires could lead to courts finding the government partly to blame for the extent of the damage.  I am sure that’s the position the insurance companies will assert.  This would put the state and the county on the hook for billions.

 

Hawaii’s government has attempted to get a head of any pending litigation claiming the State and Maui County contributed to the extent of the Lahaina fire.  While Hawaii’s share of the $4-billion settlement currently tied up in the courts seems minuscule, compared to the losses in Los Angeles, the estimated $800,000,000 (eight hundred million) Governor Green approved still represents about 4% of our state’s annual budget.  How does our state write a check for nearly a billion dollars, and it won’t impact other government funding?  That’s the pledge of Governor Green.

 

This Lahaina settlement is by no means settled.  The proposed settlement is pitting roughly 18,000 victims and their personal injury attorneys against another group who filed a class-action claim.  The main argument between these two groups is $1-billion in fees the personal injury attorneys claim they are rightfully owed.  The class-action attorneys claim the attorneys representing the 18,000 are ambulance chasers and should get less.  A judge on Maui will decide how much the attorneys get later this month.

 

This settlement also excluded the insurance companies.  They have paid out over $2.3-billion and want to sue to recoup their losses.  That matter is stuck at the state’s Supreme Court.  Depending on how the court decides, the $4-billion settlement could unravel.  The Governor, when announcing the settlement, said the claims could have reached $10-$12 billion dollars.  If this all blows up in the courts, expect us taxpayers to foot an even larger portion of the settlement.

 

Thankfully the loss of life is low in the LA fires.  What will be interesting to see is what progress is made in rebuilding the homes in LA versus the pace of rebuilding on Maui.

 

 

 

 

 

And now the week’s economic news…….

 

Labor Market Surges

A wide range of major economic data released this week was stronger than expected, which increases future inflationary pressures.  As a result, mortgage rates climbed to their highest levels since April.

 

The key Employment report revealed that the labor market surged for the second straight month, as the economy added 256,000 jobs in December, far above the consensus forecast of 160,000.  Sectors displaying strength included retail, health care, and leisure/ hospitality.  In addition, the unemployment rate unexpectedly declined from 4.2% to 4.1%.  Average hourly earnings, an indicator of wage growth, were 3.9% higher than a year ago.

 

Two other significant economic reports released this week by the Institute of Supply Management again revealed diverging fortunes for two important segments of the economy.  The ISM national services sector index rose to 54.1, above the consensus forecast.  The national manufacturing index increased to 49.3, also above expectations, but this was still its ninth straight month under 50.  Since readings above 50 indicate an expansion in the sector and below 50 a contraction, these reports continue to reinforce the fact that service companies have been outperforming manufacturers in recent months.

 

The minutes from the December 18 Fed meeting released on Wednesday provided a closer look at the reasons that officials shifted to a more hawkish (tighter) outlook for future monetary policy.  As a reminder, the latest forecasts from officials following the meeting anticipated just two additional 25 basis point federal funds reductions this year, down from four rate cuts in the prior set of projections three months earlier.  According to the minutes, unexpectedly stubborn recent inflation data and uncertainty about changes to trade and immigration policies were two primary considerations behind the revised outlook.

 

 

 

Next Week

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy.  For economic reports, the main event will be CPI on Wednesday.  The Consumer Price Index (CPI) is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.  Retail Sales will be released on Thursday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will come out on Friday.

 

Until next week….