When State Farm announced last week that it will no longer offer new house insurance policies in California, the announcement made national headlines. The business, which had 20% of the market in 2021, was California’s largest single provider of bundle home insurance plans, so some people took the news as the start of a new emergency with insurers fleeing a state devastated by fire and flood.
But the withdrawal of the largest home insurance company in California is just the most recent twist in a wildfire-fueled crisis that has simmered below the surface of the state’s insurance market for years.
Following the devastating fires of 2017 and 2018, a whopping 42% more Californians—nearly 235,000 households—were informed by their insurer that their policy wouldn’t be renewed. Years of industry revenues were lost due to the two devastating wildfire years.
AIG informed hundreds of consumers that their home insurance policies would not be renewed last year, while high-end insurer Chubb announced that it will keep refusing to renew coverage for certain of its clients.
Additionally, thousands of condo owners discovered themselves uninsurable by the end of last year as the state’s regulated insurers dumped suburban homeowner association members across San Diego County’s prone to wildfire shrubland in large numbers.
“State Farm sort of publicly said what they were doing, but I think for the last few years, we’ve all seen insurers restricting and pulling back their business in California,” said Seren Taylor, vice president of Personal Insurance Federation of California, a trade association that includes State Farm.
State officials emphasized that State Farm’s current policyholders will not lose coverage.
It’s crucial to remember that current customers won’t lose their insurance, according to a letter from Michael Soller, deputy insurance commissioner at the California Department of Insurance. People who are looking for home insurance will be impacted by this choice because they will have one less source to select from.
In a news release, State Farm pointed the finger at rising natural catastrophe risk, particularly from wildfires, and “a challenging reinsurance market,” for making it more expensive to repair after a property is damaged in California.
Insurance firms typically buy their own insurance, or “reinsurance,” to reduce the possibility of being suddenly faced with expenditures totaling millions of dollars, as can occur after a devastating wildfire or a large hurricane.
Reinsurance rates have increased recently in disaster-prone regions like California, which was devastated by fire, and Florida, Louisiana, and Texas, which were pummeled by storms. According to California law, insurers are not allowed to charge their clients for reinsurance. Industry associations are pushing for that to change.
“This is tough for legislators,” said John Norwood, a lobbyist for independent insurance brokers. “Because the solution is prices going up.”
How California regulates home insurance
Insurance firms may be ready to assume risks such as high rebuild costs, increasingly destructive wildfires, and expensive reinsurance costs.
But only for the right price.
California’s elected insurance commissioner, Ricardo Lara, has the authority to accept or reject increases in insurance prices. Industry associations have long contended that Lara’s office has prevented service providers from setting prices that are reasonable given the high cost of operating in California’s fire-prone region.
“We have very inexpensive home insurance in California,” compared to other states, said Michael Wara, a lawyer and climate scholar at Stanford Law School. “But the thing is, five years ago, we realized ‘oh yeah, actually in California you can burn down 50,000 houses overnight.’”
Five years ago, we realized ‘oh yeah, actually in California you can burn down 50,000 houses overnight.’
MICHAEL WARA OF STANFORD LAW SCHOOL
Dan Dunmoyer, head of the California Building Industry, cautions that the long-term effects of a steady exodus of insurers from California could be even more expensive.
He uses the history of California as an example. Many house insurance companies decided to completely stop doing new business in California after the 1994 Northridge Earthquake caused an estimated $42 billion in damages throughout Southern California.
The state’s real estate market came to a grinding standstill as a result of the exodus of insurers because most mortgage loans fundamentally demand homeowners insurance, according to Dunmoyer.
“The whole world stopped,” he said. “That’s the worst case scenario. We’re not quite there yet.”
Can California block State Farm’s retreat?
There are many different suggestions, some more extreme than others, about what the state should do to retain State Farm in the market.
Consumer Watchdog asserted on Tuesday that Insurance Commissioner Lara had the authority to require State Farm to change its mind. This ability, according to the group, derives from Proposition 103, a ballot measure that was approved by the public in 1988 and provided the department the right to accept or reject premium increases.
Wara, from Stanford Law, said the idea was a “non-constructive approach to this problem.”
He claimed that if the California insurance agency exercised such jurisdiction, the whole insurance business would probably sue the state and the case would take several years to be resolved. He claimed that he finds it “hard to believe” that a court would order the insurance sector to continue issuing new policies throughout the time the issue was being litigated.
According to Wara, “that is a recipe for the entire market to collapse, possibly overnight.” “That would destroy not just the insurance market, but everyone in California who has a mortgage and everyone who wants to buy or sell a home.”
Last resort for California homeowners
Another threat to the state’s insurance market is the potential extinction of the FAIR Plan, a limited insurance option for Californians when no regular private insurer will provide coverage. Levies on private insurance businesses that conduct business in the state are used to pay for it.
According to Amy Bach, executive director of the consumer organization United Policyholders, “a lot of other insurers have stopped selling.” A broker or agent today will tell you that it can be challenging to acquire insurance outside of the FAIR plan, according to Bach.
The FAIR Plan is disproportionately at danger as California experiences an increase in the probability of catastrophic wildfires. Additionally, according to Stanford’s Wara, if a very bad fire season causes the plan to fail, the remaining insurers operating in the state will be responsible for paying the bill in proportion to their market share.
The biggest insurer, State Farm, would be required to contribute the most. That is one possible explanation for why the company chose against only issuing new policies in California’s low-risk wildfire regions. “State Farm is saying, ‘We want less of that,'” Wara said.
That problem isn’t unique to California.
There is speculation of an impending catastrophe in Texas as a result of the growing severity of hurricanes throughout the Gulf Coast driving tens of thousands of homes onto the state’s designated backstop insurer.
The crisis could already be here in Florida. In order to prepare for the upcoming hurricane season, Florida’s insurance commissioner this week authorized a $1.25 billion line of credit to the state’s insurer of last resort, which is now the only insurer.