California’s Homeowner Insurance Problem

California’s Homeowner Insurance Problem

California homeowners are facing the withdrawal of insurers from the state’s homeowner insurance market and rapid premium increases, leaving residents grappling with uncertainty and financial strain. In this article, we delve into the causes behind this unsettling trend, explore the impact on homeowners, examine the measures being taken to address the crisis, and provide insights into the changing landscape of insurers.

Homeowner Insurance Providers Exit California Amidst Rising Costs

California has long been susceptible to natural disasters like wildfires, earthquakes, and floods. In recent years, these risks, coupled with increases in construction cost and inflation, have led to significantly increased costs for homeowner insurance providers. In response, several of California’s largest insurers opted to scale back their operations or exit the California market altogether

State Farm, one of the largest insurers in California, is one of the most notable insurance providers that has implemented plans to scale back its present in the California homeowner insurance market. In May of 2023, State Farm announced it “will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023.” The reason cited by State Farm was “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” In January of 2024, State Farm announced it would be increasing insurance premiums for renewals by an average of 20%, again citing increased construction costs and risk. More recently, in March of this year, State Farm announced plans to discontinue coverage for more than 72,000 houses and apartments.

The issue goes far beyond just State Farm. At least seven other major insurers, including Allstate, Farmers, USAA, Travelers, Nationwide, Hartford, and Chubb have all similarly announced plans to scale back issuance of homeowners’ insurance policies in California. These insurers make up about 35% of California’s homeowner insurance market.

What This Means For Homeowners

The withdrawal of insurers has left many California homeowners in a precarious position. Notably, most mortgage providers require borrowers to secure homeowner insurance, leaving homeowners in the position of being required to obtain coverage that is becoming increasingly more expensive. Not only do homeowners face the prospect of losing their insurance coverage, but those who manage to secure new policies are often met with substantial premium increases. For those living in homes subject to a Homeowners’ Association, non-renewal or inability to obtain coverage often means the homeowners are unable to sell their homes. The problem is poised to worsen as more insurance providers exit the market and inflation continues to drive up the cost for insurers who remain.

Many homeowners have been forced to turn to California’s FAIR plan. The FAIR Plan Association is a pool of insurers required by state statute to provide fire-insurance policies when property owners can’t find coverage elsewhere. The California Insurance Department has oversight over the FAIR Plan, including approval of rate changes. The FAIR Plan was originally created as a temporary, last-resort alternative for homeowners who are unable to obtain insurance elsewhere, but homeowners are being increasingly forced to look to the FAIR Plan for long term coverage.

California’s Efforts To Battle Homeowner Insurance Departures

One key component pushing insurers out of the state is California’s Proposition 103, which requires state approval before insurers may increase premiums by more than 7%. This process typically takes about six months, making it close to impossible for insurers to increase rates efficiently. As a result of the cap on rate increases, California’s homeowner insurance policy premiums are artificially low, at about 30% less than the national average.

In response, California’s Insurance Commissioner Ricardo Lara recent announced a Sustainable Insurance Strategy, intended to incentive insurers to remain in California and continue writing policies. A major component of the policy is to allow insurers to use “catastrophe modeling” to calculate new insurance premiums, meaning that they can utilize forecasted costs as opposed to historical costs. In short, it means that insurers will be able to justify higher rate increases for insurance premiums. The strategy also includes rewarding homeowners with discounts if they implement risk mitigation efforts, such as fire hardening. The policy aims to implement the one of California’s largest insurance reforms by the end of 2024.

Looking Ahead

The withdrawal of insurers from California and the rise in homeowner insurance premiums underscores the pressing need for insurance reform and implementation of mitigation efforts. While the state must act to encourage insurers to remain, both the state and individuals must also take steps to reduce wildfire risk. Unfortunately, the answer to the problem likely includes efforts to both allow increased premiums while also reducing potential costs to insurers.

If you would like to further discuss this issue or how Esquire Real Estate Brokerage can help you in the Southern California real estate market, please call or email us at 213-973-9439 or info@esquirereb.com.

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