Insurance Insights

Gloomy State of the California Insurance Market

Article reading time: 3 minutes

The exodus of insurance companies leaving California has continued to grow over the past few years. The combination of costly natural disasters (wildfires, flooding, and high cost to repair homes) and the growing reinsurance costs have catalyzed many companies’ exit. In the last year alone, several insurance companies have decided not to renew homeowner insurance policies or accept new applications. The list includes Allstate Insurance, Metastar, Unitrin Direct Property and Casualty Insurance, and Kemper Independent Insurance Company. Most recently, State Farm announced it will not renew 72,000 homeowners and other property insurance policies. This means several of the top insurance companies have stopped writing new policies. It has become nearly impossible for carriers to profit when state regulations require premium increases of 7% or higher to be approved by the Insurance Commissioner.

What is Proposition 103?

Originally passed in 1988, it was designed to protect individuals and families from arbitrary rate increases and to encourage a competitive marketplace. Proposition 103 created a system that requires prior approval for a rate increase. Without this, an insurer cannot implement new property and casualty premium increases. Several lines of insurance are regulated by Proposition 103, including auto, fire, earthquake, homeowners, commercial aircraft and vehicles, umbrella, professional liability, and farm owners. The protections implemented have been useful in the past but have become a key reason so many have left the state.

Challenges with Proposition 103

For many, Proposition 103 has made it nearly impossible to raise rates to accommodate changing risk profiles. Most insurance companies use computer modeling to predict future risks, including climate change. The issue is that companies must disclose modeling to the public, which companies prefer to avoid. As a result, premiums are set based on loss rates over the prior 20 years, which means predicted trends based on real-time data cannot be considered. For example, in the 20 years from 2003 to 2022, wildfires burned an average of 1 million acres per year. Yet between 2017 and 2022, wildfires burned an average of 1.8M acres while damaging 50,000 structures. The claims cost is naturally higher, but Proposition 103 makes it difficult to implement the needed increase.

Proposed Changes

Insurance Commissioner Ricardo Lara’s office recently unveiled a plan to address this situation. The plan will update regulations permitting insurers to include future risk modeling when setting premium rates. Companies will only be allowed to do this if they agree to write more policies for homeowners in areas with the highest risk. Companies must write policies in high-risk areas with no less than 85% of their statewide market share. If a company insures 20 out of 100 homes, it must write 17 policies in high-risk locations. The proposal still requires carriers to receive permission before raising rates. It is projected these new rules will be completed by December 2024.

Impact on Homeowners

The impact of the situation has been significant. Some have decided to go without insurance, while others have turned to the California Fair Access to Insurance Requirements Plan (Fair Plan) for basic fire protection coverage in high-risk areas. The number of policies issued has significantly increased to 272,846 in 2022. However, state-sponsored policies cost much more. One homeowner who needed fire protection coverage turned to the FAIR Plan for help. While he could receive coverage, the premium increased by 145% from $399 to $979. This leaves homeowners with rising insurance costs and the most basic coverage. Unfortunately, there are often no other options to pursue.

I recently experienced my own personal struggle to obtain homeowners insurance after being dropped by my carrier. After several unfortunate circumstances, I began to chronicle my journey to find coverage.

We’re here to help

The insurance market in California is facing a challenging period. The exit of major carriers caused by increasing claims and inflexible state rules have left many with few options. Even the FAIR plan, designed to be a fail-safe for those without other options, may sharply increase premiums. As a result, many families are facing challenging situations. If you have questions about the information outlined above or need assistance with a tax or compliance issue, JLK Rosenberger can help. For additional information, call 818-334-8623 or click here to contact us. We look forward to speaking with you soon.

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