State Farm made national headlines last week when it announced it would stop selling new homeowners insurance policies in California. As California’s largest single provider of bundled home insurance policies – the company held 20% of the market in 2021 – the news struck some as the start of a new emergency, with insurers abandoning a fire-ravaged state and floods.
But the retraction of California’s largest home insurance provider is just the latest development in a wildfire-fueled crisis that has been smoldering below the surface of the state’s insurance market for years.
After the catastrophic fires of 2017 and 2018, the number of Californians who were told by their insurer that their policy would not be renewed jumped 42% to nearly 235,000 households. The two years of severe wildfires wiped out decades of industry profits.
American International Group told thousands of customers last year that their home insurance policies would not be renewed, and Chubb, a premium insurer, said it would continue to not renew some of its clients.
And late last year, thousands of condo owners also found themselves among the uninsurable as state-regulated insurers dropped suburban homeowners’ association members en masse in the wildfire-prone shrubs of San Diego County.
“State Farm kind of went public with what they were doing, but I think over the last few years we’ve all seen insurers restrict and withdraw their business in California,” said Seren Taylor, vice president of Personal Insurance. Federation of California, an industry trade group that counts State Farm among its members.
State officials emphasized that current State Farm policyholders will not lose their coverage.
“It is important to note that current customers will not lose their insurance,” Michael Soller, assistant commissioner of insurance with the California Department of Insurance, wrote in an email to CalMatters. This decision will affect people buying home insurance, in that they will have one less provider to choose from.
State Farm, in a press release, blamed high construction costs that make it very expensive to rebuild after a home in California was destroyed, the growing risk of natural disaster – especially wildfires – and “a market difficult reinsurance”.
Insurance companies frequently purchase their own insurance – known as “reinsurance” – to minimize the risk of incurring millions of dollars in costs at one time, such as might occur in a catastrophic wildfire. or a major hurricane.
Reinsurance premiums have skyrocketed in recent years in disaster-prone states like fire-ravaged California and storm-ravaged Florida, Louisiana and Texas. California law prohibits insurers from passing on the cost of reinsurance to customers. Industry groups are pushing to change that.
“It’s difficult for lawmakers,” said John Norwood, lobbyist for Independent Insurance Brokers. “Because the solution is higher prices.”
How California Regulates Home Insurance
High reconstruction costs, increasingly severe wildfires and high reinsurance prices are all risks that insurance companies might be willing to take on.
But only for the right price.
Insurance premium increases in California are approved or denied by the state’s elected insurance commissioner, Ricardo Lara. Industry groups have long argued that Lara’s office failed to allow suppliers to set prices commensurate with the cost of doing business in fire-prone California.
“We have very cheap homeowners insurance in California,” compared to other states, said Michael Wara, director of the climate and energy policing program at the Stanford Woods Institute for the Environment. “But the thing is, five years ago we realized ‘oh yeah, actually in California, you can burn down 50,000 houses overnight. “”
The consequences of a continued drip decline by California insurers could be far more costly in the long run, warns Dan Dunmoyer, president of the California Building Industry.
By way of illustration, it evokes the history of California. After the 1994 Northridge earthquake caused an estimated $42 billion in damage in Southern California, many home insurers chose to stop doing new business in California altogether.
Because home insurance is a basic requirement for most home loans, the exodus of insurers has caused the state’s real estate sector to shut down, Dunmoyer said.
“The whole world has stopped,” he said. “It’s the worst case scenario. We are not there yet. »
Can California block State Farm’s retirement?
There are various ideas floating around about what the state can do to keep State Farm in the market, some more drastic than others.
The Consumer Watchdog advocacy group argued Tuesday that Insurance Commissioner Lara had the power to order State Farm to reverse its decision. That authority, the group said, comes from Proposition 103, a voter-backed initiative passed in 1988 that gave the department the power to approve or deny premium increases.
Wara, of Stanford Law, said the idea was an “unconstructive approach to this problem”.
He said the entire insurance industry would likely sue the state if the California Department of Insurance were to assert that authority, and the lawsuit would take several years to resolve. He said he found it “hard to believe” that a court would force the industry to continue issuing new insurance policies for the years the case was in court.
“It’s a recipe for the whole market to collapse, potentially overnight,” Wara said. “It would not only destroy the insurance market, but anyone who has a California home loan, anyone who wants to buy or sell a home in California.”
Last resort for California homeowners
Another sword hangs over the state’s insurance industry: the possible demise of the FAIR Plan, the limited insurance plan Californians can turn to when no standard private company will cover them. It is funded by levies on private insurance companies that do business in the state.
“A lot of other insurers have stopped selling,” said Amy Bach, executive director of United Policyholders, a consumer group. “If you talk to an agent or broker today, they’ll tell you that it can be quite difficult to find insurance” outside of the FAIR plan, Bach said.
As the risk of a catastrophic wildfire increases across California, that risk falls disproportionately on the FAIR plane. And if a particularly severe fire season renders the plan bankrupt, the tab will fall on insurers who still do business in the state in proportion to their market share, Stanford’s Wara said.
State Farm, as the largest insurer, is expected to contribute the most. This is one of the reasons the company may have decided not to issue new policies. everywhere in California rather than simply limiting the new policies to places with low wildfire risk. “State Farm is saying ‘we want less of this,'” Wara said.
This problem is not unique to California.
In Texas, the increasing severity of Gulf Coast hurricanes has driven tens of thousands of homeowners to that state’s licensed backup insurer, leading to talk of an inevitable crisis.
In Florida, the crisis may have already arrived. This week, Florida’s insurance commissioner authorized a $1.25 billion line of credit to that state’s insurer of last resort — now the largest insurer — in preparation for the upcoming storm season.
About the Author
Ben covers housing policy and previously covered California politics and elections. Prior to these roles at CalMatters, he contributed writing to CalMatters, which reported on the state economy and budget. Based in the San Francisco Bay Area, he has written for San Francisco Magazine, California Magazine, San Francisco Chronicle and Priceonomics. Ben also has a past life as an aspiring beancounter: He worked as a summer associate in the Congressional Budget Office and holds a master’s degree in public policy from the University of California, Berkeley.
Grace covers the California economy for CalMatters. Previously, she was an editor at the Washington Monthly. She graduated from Pomona College.
Cal Matters is a nonprofit, nonpartisan newsroom committed to explaining California politics and politics.