You read that right…we are in a CRISIS situation here in California when it comes to homeowner’s insurance. Major insurers are canceling existing policies, refusing to write new ones, or leaving the state entirely. Of the 12 insurers covering 85% of the market, seven have recently stopped or limited their business in California. In 2023 alone, State Farm, Farmers, CSAA, Liberty Mutual, and Allstate ceased writing new policies, with ‘luxury insurers’ such as AIG and Nationwide following suit in early 2024. Over 100,000 policies have been non-renewed since 2020, with 72,000 from State Farm alone.
The last decade has seen a rise in extreme disasters, particularly wildfires, resulting in over $70 billion in losses since 2017. As a result, many homeowners with high fire risk scores have had their policies canceled or non-renewed.
Regulatory and Financial Challenges
Historically, California has been a low-cost state for insurance due to stringent regulatory requirements. Proposition 103, passed in 1988, caps premium increases at 6.9% annually, making it difficult for insurers to adjust rates to cover rising risks. Additionally, California is the ONLY state to require insurers to use 20 years of past claims history to set future premiums, rather than using forward-looking catastrophe models like other states. These regulations have led to significant financial losses for insurers, who are now exiting the market rather than offering unsustainable policies.
The harsh reality is these insurance companies are corporations – they are not REQUIRED to offer their policies anywhere. They can choose which states to write business in…or not. It is important to note that the net profit margin for property and casualty insurance companies is only 5%. This is not price gouging! It is a case of insurers wanting to charge premiums that cover the claims they expect to pay out.
Options for Homeowners
With fewer insurers available, California homeowners are left with three levels of insurance options:
Preferred/Admitted Insurers: These companies offer the best coverage but are increasingly non-renewing policies due to wildfire risks and other factors. Examples include State Farm, Allstate, and Farmers.
Non-Preferred/Non-Admitted Insurers: These companies provide less comprehensive coverage with higher premiums and are not backed by the state. Examples include Lloyd’s of London and Scottsdale. These insurers do NOT have to follow California regulations. If the policy holder files a claim that can’t be paid because the insurance company becomes insolvent, the claim is simply unpaid.
California FAIR Plan: The last resort for high-risk properties, offering limited coverage primarily for fire. However, the FAIR Plan is underfunded and could face insolvency after a major catastrophe, which further deters insurers from doing business in the state. The California FAIR Plan is writing the highest risk policies and has $2 billion in assets to cover potentially hundreds of billion dollars in claims. The remaining insurers in California are liable for any underfunding in the FAIR Plan regardless of whether they are receiving any premium income from the plan. This loss scenario is another reason why insurers are leaving the state.
This situation underscores the need for regulatory reform to stabilize the insurance market and ensure that homeowners can obtain reliable coverage.
The post PART 1 – California Homeowner’s Insurance Crisis first appeared on Asti Financial.
