Home insurance in California that is limited by major providers.

California has a population of nearly 40 million, which is 55 percent of the state’s population. If you’re a current or potential homeowner in California, finding a affordable insurance company may be difficult. The state’s high risk of wildfire has traditionally been a concern for insurance companies, but the increasing prevalence of wildfire and the increasing cost of home construction have led some insurance companies to a threshold for intervention. Seven of the state’s largest property insurance providers, including State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb, have recently decided to limit the new homeowner’s insurance in the Golden State, this has led to questions about the stability of the state’s home insurance market.

The insurance team at Bankrate is dedicated to tracking the California insurance market and has conducted a comprehensive study of what is necessary for California homeowners in regards to securing insurance in these difficult times. We will discuss why some insurance companies have chosen to halt the writing of new home policies, and what this may mean for the future of homeownership in California.

What is the state of the home insurance market in California?

Despite the fact that California’s home insurance market has been in the news more recently, like Florida, problems have been simmering under the surface for a long time, with challenges in coverage increasing in the late 2022. The timeline below illustrates the way some of the state’s major home insurance providers have reconsidered their participation in the state’s home insurance market:

• Nov. 2, 2022: Following the release of its 2022 third-quarter financial report, Allstate stopped writing about new homeowners and Condominium insurance in California. In an email to Bankrate, a spokesperson for Allstate stated that the expense of covering new homeowners in California is significantly higher than the price they would pay for policies due to wildfires, increased costs for repairs of homes, and increased premiums on reinsurance. In its third-quarter report, the insurer noted that it will continue to cover its existing customers.
• May 26th, 2023: State Farm announced that starting on May 27th, 2023, it would no longer accept new applications for businesses or personal property and casualty insurance, but that its decision would not have an effect on personal auto insurance. Similar to Allstate, State Farm also attributed “increases in historical costs of construction that were outpaced by inflation,” “increased catastrophe exposure that is rapidly growing,” and a “contesting insurance market.”
• July 7th, 2023: The San Francisco Standard was the first to acknowledge that Farmers would write a smaller number of home insurance contracts in California. Unlike State Farm and Allstate, which took effect on July 3rd, 2023, Farmers will still write new policies that are consistent with the volume they are projected to write each month before the recent market changes, per the company’s statement. Similar to Allstate and State Farm, Farmers also noted that “record-breaking inflation, severe weather, and reconstruction costs that are still increasing” as the cause of its limited coverage.
• July 21st, 2023: AmGUARD and Falls Lake Insurance have submitted a withdrawal with the California state insurance department. AmGUARD, a subsidiary of Berkshire Hathaway’s GUARD Insurance, has around 50,000 active home policies in California, while Falls Lake only has around 900. AmGUARD and Falls Lake will no longer create new home insurance policies in California or drop existing policies at the time of their renewal.
• Aug. 2, 2023: Safeco announced plans to reduce the number of home insurance policies in San Francisco and the wider Bay Area by October of 2022. It’s expected that around 950 policies will be affected by the decision. In an email to The San Francisco Standard, a spokesperson from Liberty Mutual (Safeco’s parent company) mentioned the potential danger of an earthquake and fires in specific areas as the cause of the decision to sever ties with specific ZIP codes. Policyholders that have maintained a Safeco insurance contract since 2000 will not be adversely affected by the new legislation, nor will Californians outside of the Bay Area have this type of insurance.
• Aug. 30, 2023: The American Association of Colleges of Nursing informed the public that it would begin to restrict the coverage of California’s homes in March of 2024. The U.S. will increase the safety of its wildfires, and only guarantees the safety of homes with a risk score of 12 or less, with 32 being the maximum possible. In its notice of rate filing with the California Department of Insurance, the American Society of Agronomists labeled “expected rate inadequacy” as the cause of the new rules. Along with the stricter wildfire safety rankings, two of the subsidiaries of USAA — the Casualty Insurance Company of USAA and the Garrison Property and Casualty Insurance Company of USAA — will no longer accept applications for homes that were previously uninsured. Instead, the two companies will only consider applications from customers who are replacing current home insurance policies with new ones.
• September 21, 2023: Shortly after the order was issued by the governor of California, the Insurance Commissioner of Ricardo Lara published his Sustainable Insurance Strategy, which involved a multi-level approach to addressing the home insurance market.
• Jan. 24,2024: The Hartford company announced that beginning on February 1st, 2024, they would no longer create new insurance policies for state property. The Hartford only covers 2 percent of the state’s home insurance policies, but through its association with AARP, elderly homeowners could be greatly affected.
• On February 29th, 2020, the American National Insurance Corporation announced that it would no longer provide home insurance in nine states: California was one of them. Nonrenewal notices are projected to be released in August, and it is believed that the decision will have an effect on approximately 36,000 policies. The insurance company mentioned that profitability, inflation and the volume of claims were all factors in the decision.
• March 20, 2024: In a public statement, State Farm made it clear that it would not renew around 30,000 home, rental dwellings, and other property insurance policies in California. Nonrenewals will become active on July 3rd, 2024 for home insurance contracts.
• March 28, 2024: AM Best decreased the financial viability rating of State Farm General Insurance from A (Excellent) to B (Fair). State Farm General Insurance Company is a affiliate of State Farm that underwrites home insurance in California.

Why are insurance companies witholding new policies from California?

Combined, State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb took over approximately “35 percent” of the home insurance market in California in 2022. With seven major home insurance providers in California that either stopped or limited new policies, smaller providers followed suit, this begs the question – how did this happen?

No one knows why each provider has chooses to halt the California home insurance market. Instead, there are several significant reasons. The regulations of California’s state insurance, inflation, increased wildfires and increased reinsurance costs have all contributed to the current state of California home insurance.

Proposition 103 and the California Department of Insurance

If the cost of taking on new policies for California home insurance has increased significantly for some of the state’s major insurance companies, why can’t they simply increase the premiums to correspond? The answer is located in a 35-year-old piece of California state law, Proposition 103.

Proposition 103, or Prop 103, was enacted in 1988 to shield insurance policyholders from increased rates of harm across auto, property, life and casualty insurance. Under Prop 103, insurance companies are required to submit increases in rate that are greater than 7% in order to be approved by the California Department of Insurance. Similar to any other procedure that requires government approval, it typically involves lengthy paperwork.

The government is not the sole entity responsible for the process: “interveners”, either consumers or their advocates, can participate in and challenge the rate submissions. Proposition 103 grants these participants the ability to sue insurance companies and demand that they pay the costs of the lawsuit. The insurance industry has specialists in California that have been controversial over time, some of the claim that the process is more beneficial to the pocket than it is to the actual homeowner. Similar to government approval, the process of intervention can halt the rate of filing to a significant degree.

Proposition 103 gives insurance companies the right to receive approval for a rate in 60 days. However, the California Department of Insurance has currently instated a policy that requires insurance companies to relinquish their right to a fast rate decision on Prop 103. The process of approval, which typically takes about six months, slowed the rate-raising process, which is essentially stopped, as a result, the cost of home insurance has been frozen at an unsustainable rate. With unsustainable rates and no quick solution to increase them, insurance companies may be compelled to limit the number of new policies they accept in order to remain financially viable.

The annual cost of home insurance in California is $1,403 for a $300,000 home, which is approximately 35 percent less than the national average. Proposition 103’s stringent rate increase regulations keep the cost of home insurance in California artificially low.

The California Department of Insurance not only regulates the maximum amount of insurance companies that can increase rates, but also the way they calculate these changes. California insurance companies have historically lacked the ability to include wildfire modeling in the process of calculating rates, they are instead limited to historical information when determining the rates. This implies that they cannot observe the recent damage caused by wildfires in order to estimate the potential costs in the future. While this may have been effective in the past, the risk of wildfires in California has increased from what it was to a dangerous level.

The annual cost of home insurance in California is $1,217 for a $250,000 home, which is approximately 28 percent less than the national average. Proposition 103’s stringent rate increase regulations keep the cost of home insurance in California artificially low.

The California Department of Insurance not only regulates the amount of insurance companies that can increase rates, but also how they can calculate the changes in rate. California insurance companies have historically lacked the ability to include wildfire modeling in the process of calculating rates, they are instead limited to historical information when determining the rates. Meaning, they have no ability to assess the recent damage from wildfires in order to predict future monetary costs. While this may have been effective in the past, the risk of wildfires in California has increased from what it was to a dangerous level.

Wildfires

California is endowed with a variety of different natural catastrophes. Earthquakes, landslides and wildfires destroy the natural scenery and pose a threat to millions of residences with serious damage. Occasionally, disasters occur simultaneously. After a wildfire, the soil that was burned is more water-resistant, this allows even small amounts of precipitation to produce a flood or landslide.

California’s fire risk in the wild is unique. Over 2 million homes in California are considered to have a high or extreme risk of wildfire damage, the state continues to be listed as the most affected by fireworks annually. Even more frightening, the wildfire season has increased in scope from a couple of months to nearly all of the year.

The issue is increasing in severity. A research study from the International Journal of Wildland Fire claims that ” climate change has had a significant role in the changing nature of California wildfires… The climate of California became more warm and more dry from 1980 to 2020, surpassing earlier 20th century conditions and likely those of the past 1000 years.”

Wildfires are not only costly, but they are also increasing in number and scope. The National Interagency Coordination Center projects that, by 2022, California fires will have cost approximately $380 million in damage.

Inflation

inflation has affected every aspect of the cost of things, from the price of a dozen eggs to airline tickets and, most importantly, the cost of building materials like wood and shingles.

From January 2019 to June 2023, the price of construction materials increased by nearly 40%. To put this number into perspective, the consumer price index had its highest in June of 2022 at 9.1 percent. Despite the fact that inflation has decreased since the summer of 2022, experts still believe that it continues to have an effect on homeowners.

These extreme increases in raw costs of construction pose significant dangers to the insurance companies’ financial standing. When you pay your insurance costs, an insurance provider participates in the payment and reserved the funds to pay out claims. If the cost of claims becomes too high or frequent, the insurance company may be unable to honor its commitment to pay them out.

High expense of insurance

inflation and climate change are already familiar concepts, but reinsurance is a new term that may be used by many homeowners. Reinsurance is a policy that insurance providers utilize to cover themselves from loss. Here is the procedure. Insurance companies have a business model that involves providing insurance to their customers. If all of the policyholders in a given area file their claims simultaneously (as would happen after a natural disaster, such as a wildfire), an insurance company could become vulnerable to financial instability. That is where reinsurance arrives; a reinsurer can assist in covering losses over a defined range.

Reinsurance is particularly beneficial to homeowners with insurance in the wildfire region of California, this is because it allows them to continue to receive insurance benefits. However, the costs of reinsurance are increasing. The premium for property reinsurance has increased by 50% from April to July of 2023, according to a report by Gallagher Re, a worldwide reinsurance broker. When conversing with Bankrate, Janet Ruiz, the director of strategic communications for the Insurance Information Institute, observed that there was a similar degree of difficulty in both the California home insurance and reinsurance industries, as a result, prices have increased significantly due to the same reasons: inflation, climate risk, etc.

What is the next step for the home insurance market in California?

On July 13th, 2023, the California Department of Insurance hosted a public discussion about modernizing Prop 103 in order to allow insurance companies to utilize wildfire modeling in the calculation of their rates. Catastrophe modeling is already employed to estimate the magnitude of an earthquake’s effects, and to assess the potential for fires following an earthquake. If Proposition 103 were revised to include a model for wildfire accounting, this would perhaps convince home insurance providers to relax their limitations on policy.

The legislative session of California’s state government ending on September 14th, 2023. Rumors circulated about a “Hail Mary” bill that was intended to lure back California homeowners to the state, but the bill failed to live up to its potential before legislators were able to present a formal proposal. According to Politico, the bill would have granted California insurance companies the ability to increase the rates they charge more easily, this would have led to a greater ease in raising the necessary funds to return to California.

After the bill failed, the California governor issued a policy executive order on September 21st, which called for “prompt regulatory action” in order to improve the efficiency, speed and transparency of the rate approval process. The order will allow the California legislature to create new rules that will allow insurance companies to utilize wildfire modeling in the calculation of rates, but these rules will require insurance companies to write more policies about homes in high-risk areas. While this does not completely reverse Proposition 103, it conveys a powerful message from the governor’s office that Prop 103 should be revised.

The Sustainable Strategy for California’s Insurance Program

Following the order of the governor, the California Insurance Commissioner’s office announced the Sustainable Insurance Strategy. “Sustainable” has a dual purpose: the reforms of Lara are intended to promote the long term viability of the California home insurance market and address climate change. They are the greatest alterations to insurance since Prop 103 was created in 1988.

The strategy employs a four-pronged approach:

• Get the largest insurance companies to write policies for high-risk areas: The California Department of Insurance is seeking the top 12 companies that have home insurance in the state, these companies must commit to writing at least 85 percent of their policies in areas that are underserved, particularly in regards to wildfire risk.
• Unburden the FAIR’s mission: Companies and homes that follow the “Safe from Wildfires” protocol will have the first priority when it comes to leaving the FAIR’s mission and returning to the private sector.
• Permit disaster modeling and mitigation: This portion of the insurance reforms allows insurance companies to utilize disaster modeling to accurately calculate rates. Additionally, the insurance companies will offer more discounts to consumers that have fortified their homes against wildfires.
• Implement the FAIR strategy: This last point is primarily dedicated to insurance companies and aims to increase the maximum amount of money that can be covered by $20 million per structure.

Allowing catastrophe models and rewarding efforts to mitigate are both considered to be detrimental to consumers. On the other hand, it may be necessary to incentivize some of California’s largest insurance companies to return to the market. With the modeling of catastrophe as a wildfire, insurance companies may finally be permitted to price their policies at a level that matches the risk associated with the policy: one of the primary reasons for the company’s exit from the state in the first place. However, this will probably lead to increased home insurance costs for policyholders in the state as a whole.

State Farm has already received permission to increase the typical home insurance rate by 20%, which is expected to become effective on March 15th, 2024. While the number of discounts associated with mitigation efforts may be beneficial, it is still not known whether or not this is an even trade-off.

Wildfire prevention

Also important in addressing the California insurance market and combating wildfires is mitigation. The most effective way to address wildfire damage is to focus on the state’s high risk of wildfire, which is what California laws are attempting to accomplish in statewide and more locally. After suffering severe damage from the 2018 Camp Fire, the town of Paradise increased the safety of its buildings by implementing regulations to mitigate the fire. New structures are constructed with materials that are resistant to fire and follow strict rules that ensure their wildfire preparation.

California is home to the country’s largest economy and numerous insurance opportunities, this makes it a state that is sought after by insurance companies. Ruiz said that State Farm, Allstate and Farmers are all participating in the Department of Insurance’s solution to this problem, which will benefit both the insurance companies and new homeowners who want to financially protect their homes.

Increased pressure on the part of California to implement its FAIR Plan.

The home insurance market in California needs alterations, but these alterations will not occur all at once. While homeowners and insurance companies alike seek to overhaul the industry, it poses a significant burden on the California version of the Fair Tax. The FAIR strategy is a last-ditch home insurance strategy for homeowners who have failed in the private sector. If your home is located in a high-risk area, such as those that are near wild areas with a high potential for wildfire, you may be able to apply for a policy through this blueprint.

The FAIR strategy is funded by the private insurance companies in California, each insurance company contributing to the strategy based on their percentage of the market. As the number of home insurance options diminishes, more homeowners rely on the FAIR plan, which could lead to more disaster if Fraizer is correct: the potential for capital to be called is increasing as the FAIR Plan increases. When they finally require cash, this would lead to a market chaos. After paying the cash payment, insurance companies are not allowed, under current law, to take back that money for future premium payments. The FAIR Plan’s growth is causing insurance companies to want to reduce their responsibility for estimating costs by decreasing their percentage of the market. This is another potential benefit of the Sustainable Insurance Strategy. If insurance companies can calculate rates differently, this could lead to a lessening of pressure and a less sustainable dependency on the FAIR strategy.

How can California homeowners receive affordable insurance?

Hearing that some major insurance companies have stopped or limited the writing of new home insurance policies can be frightening for those who have homes in California. The California Department of Insurance has safeguards that prevent the nonrenewal of policyholder’s homes. If you live in a wildfire region, your insurance company cannot deny the cancellation of your home insurance for a year following the declaration of a state of emergency by the governor. If you’re unsure if your home is eligible, you can online check your ZIP code.

If you’re a new homeowner in California and want a policy, you may still have options regarding coverage.

The state of California has options for home insurance.

Many of the most popular home insurance companies in California are still accepting new applicants for homeowners insurance. Actually, over 100 insurance companies still write home insurance in the Golden State. While attempting to find a new policy, you may want to consider the following:

1. Consider what you need. Before you begin shopping, you must first understand how much home insurance you need. The answer will differ for each person: personal belongings, the home’s characteristics, the location of the home, and your comfort with risk will all factor into the decision, whether you need to purchase a policy or not.
2. Create a list of important things. If lowering the cost of your policy is of the utmost importance to you, you may want to consider providers that offer cheaper rates. Alternatively, you can consider insurance companies that specialize in providing coverage that is unique. Wildfire is probably going to be a named danger in your policy, but you may want to purchase an earthquake insurance supplement as well.
3. Summarize quotes. Once you have a clearer idea of what you want your policy to resemble, you can begin requesting quotes from multiple companies and comparing them. During the quote process, you can also explore the costs of additional insurance types in greater detail.