The Crazy Home Insurance Market in California
Photo by Mike Newbry on Unsplash
Has your home insurance premium skyrocketed lately?
Has your insurance company stopped writing policies in your area?
Is the home insurance market broken?
Welcome to the crazy world of getting your home insured against disaster.
Getting affordable insurance has long been an issue in places like Florida, where hurricanes are unfortunately common.
But California has been hit hard the past few years.
Let’s take a look.
What’s going on?
Simply, it’s getting much more expensive to insure your home in California.
A few of my clients in California are experiencing this firsthand. Several have seen their premiums skyrocket. One hasn’t been able to find insurance at all, and instead has been forced into California’s governmental insurance plan, the FAIR plan.
One client’s insurance agent shared that the insurance industry is in a state of chaos in California, with their clients seeing 40%+ increases and a record number of non-renewals. He said he’s been in the industry for over 22 years and has never seen anything like this.
Several major insurers have stopped or limited writing new policies:
State Farm stopped writing new policies in May 2023, though they said they’d continue to issue renewals to existing customers.
Allstate announced the same thing in June 2023.
Farmers Insurance put a cap on writing new policies in July 2023.
Safeco announced they were dropping many policies in the Bay Area in August 2023.
In fact, in the last year and a half, 7 of the top 12 insurers operating in California have either placed new restrictions on where they do business or stopped selling new policies entirely.
What’s causing this?
There are several factors.
Wildfires: This is the headline reason. Wildfires are becoming more common — of the 20 largest fires in California’s history, eight have occurred in the past several years. And climate conditions are such that when there is a fire, it tends to be more devastating.
Inflation: It’s getting more expensive to rebuild after losses. Construction costs are way up compared to even a few years ago. That means when there is an insurance claim, the insurer has to pay out more money in order to rebuild. (Speaking of which, I highly recommend that you look at your Dwelling limit to see if it would be enough to rebuild your home. Hint: It’s probably way too low…)
Reinsurance: To protect themselves from catastrophic losses, insurance companies backstop their risk by buying insurance. That’s right, the insurer buys insurance. This is (inevitably) called “reinsurance”. The problem is that reinsurance rates have been rising lately too, and insurers in CA haven’t been allowed to pass those costs along to consumers.
Regulatory environment: Insurers can’t just raise rates whenever they want. They need to get permission from the California Department of Insurance, and even then those allowable increases are limited by law. There have been steep premium increases lately, but many insurers have reached the point where they can’t raise rates any further. Insurers are finding it’s just not profitable to stay in the state.
What’s next?
California lawmakers understand the problem. And they are trying to address it.
For example, very recently steps were taken to allow insurers to factor climate risks, including wildfires, into premiums more directly, as long as the insurers write more policies in high-risk areas.
The hope is that steps like that will lure insurers back into the market and provide more choices for consumers.
Out-of-the-box ideas
What else can be done?
There are some out-of-the-box ideas and proposals out there.
For example:
What if an insurance policy was connected to the house, rather than leaving it up to each person to obtain their own insurance?
What if there was a “Carfax” type of report for houses that listed all previous insurance claims? Seems like that would really help homebuyers understand what they are getting into.
What if the home insurance market was managed by the government, similar to flood insurance?
What if home insurance was mandatory? It’s usually mandatory if you have a mortgage (the lender will require it), but if there’s no mortgage, there’s no requirement. That’s a public policy problem, as people not having insurance is bad for the economy, as rebuilding and reinvestment are delayed after a disaster.
So what can you do?
First of all, you can take steps to fireproof your home. Reducing your home’s wildfire risk not only makes your property more attractive to insurers, but also can earn you discounts on premiums. Here are a few ideas from an insurer and from an alarm company.
Next, don’t just accept a huge increase to your premium. Instead, shop around a bit. You may or may not be able to find a better rate, but it’s worth trying.
Where to look?
Here are a few options for where to get quotes:
An insurance broker you trust
Ask friends or family for suggestions.
The CA Department of Insurance has a home insurance finder tool that can provide you with a list of agents in your area.
If you’re a Costco member:
Costco partners with American Family Connect Insurance and tends to have great rates.
An online insurance broker, such as:
PolicyGenius: https://www.policygenius.com/homeowners-insurance/
Insure.com: https://www.insure.com/
What if you can’t find an insurer that will cover your home?
Here are your next options:
California FAIR Plan
This is the state’s insurance program of last resort that provides coverage to homeowners who are denied on the private market. The problem is that FAIR Plans are often significantly pricier and coverage is more limited than a standard policy. It generally doesn’t offer coverage for liability, water damage, or theft.
To address this gap in coverage, you can look into a “Difference in Conditions” (DIC) policy. Combined with a FAIR Plan policy, you’d have pretty close to the equivalent of a traditional home insurance policy. Here’s a list of insurers that offer those policies: https://www.insurance.ca.gov/01-consumers/105-type/5-residential/carriersDICpolicies.cfm
Surplus lines insurance
An excess and surplus (E&S) carrier is an insurer that provides specialized policies covering high-risk properties that may be too risky for traditional insurers. A downside to these policies is that they aren’t backed by the California Insurance Guarantee Association, which means if your house is destroyed and the insurer doesn’t have the funds to pay out your claim, you could be left having to pay for repairs yourself.
Summary
If you live in California: Hang in there. Your available options might be tough to swallow, but you do have options. And shopping around might yield some pleasant surprises.
If you don’t live in California: First of all, congratulations for reading to the end. Well done you. Second of all, it’s always a good idea to check your policy every few years to make sure you have enough coverage and that the premium is reasonable. As I said above, pay particular attention to your Dwelling amount to ensure it would provide enough money to rebuild.