Background on the Current Insurance Crisis
You may have heard that State Farm has recently stopped writing new property policies in California. They join a growing list of companies such as Allstate, Nationwide Private Client, Cincinnati, NatGen Premier and others who are no longer insuring properties. Other companies such as AIG and MetLife are no longer doing business in the state and have cancelled all their property policies. The few companies that are still accepting new business have severely tightened up their underwriting guidelines and will only write homes that have no losses in the last five years, do not have wood roofs, and are located away from canyons, brush, and open space. Some are requiring the homes be newer construction and/or have safety devices installed.
As independent agents, we have been living this retreat for the last five years. The California Department of Insurance (DOI) passed several new “consumer protection laws” in 2019 because of the 2017 and 2018 wildfires. While some of the laws were helpful to consumers, a few were punitive to the insurance companies. As a result, many companies began to non-renew homes in brushy areas.
Of the 20 largest wildfires in California’s history, 18 occurred in the last 20 years, and 18 of the 20 most destructive fires also incurred in the last 20 years. Wildfires are becoming more frequent, more severe, larger, and more deadly. At the same time, inflation and rapidly increasing construction costs are driving up the cost to rebuild damaged or destroyed homes. Another little-known cost to insurers is the cost of reinsurance, which has increased 30-40%. (Reinsurance is insurance for insurance companies. Insurance companies will typically assume all the cost of insurance up to a certain dollar amount and then transfer the rest of the risk to a reinsurer.)
All insurance companies are for-profit businesses. Any business that faces increased costs needs to raise prices to stay profitable. In the case of insurance, the insurance commissioner is not allowing companies to raise their rates. No business is excited to sell their product at a guaranteed loss.
The current situation is a crisis. Consumers who are being non-renewed or purchasing a new home are facing situations where they cannot obtain coverage or, if they can, it is very expensive. Insurers are losing money and will continue to restrict coverage until they become rate sufficient.
You may have heard about the California Fair Plan, but that is not the solution. Their policies only insure against the peril of fire, and the amount of coverage is limited to $3,000,000 of total insurance (so typically a home with a maximum replacement cost of $1,500,000.) Their policies are expensive and require the consumer to purchase a second policy, known as a Difference in Conditions policy, to cover the other perils of wind, water, theft, liability, etc. Moreover, the Fair Plan policy can only be purchased if no other insurer will offer coverage.
This includes the excess and surplus aka non-admitted carriers. These companies are not regulated by the Department of Insurance and are charging market rates. So, consumers must look here first and pay rates that are two to five times as much as their old policies. Sadly, even with these higher rates, the non-admitted companies are only offering coverage to the best risks because of increased demand and limited capacity.
The solution is simple: the Department of Insurance needs to approve rate increases for the admitted companies. If these companies can charge a fair rate, they will reopen in California. Consumers need to have a choice of companies and products. There needs to be affordable options for home buyers, homeowners with losses, older-home owners and those who live near canyons and open space.
So What Can You Do?
I encourage you to contact the insurance commissioner, Ricardo Lara, and urge him to quickly work with all the interested parties (insurance companies, consumer groups, industry representatives, etc.) to solve this crisis. A solution will strike a balance that ensures fair premiums for property owners while providing sustainability for the insurance companies. Specific action steps he can take:
- Expedite rate increases (the department admits they are understaffed and have thousands of rate increase requests to review).
- Allow catastrophic risk modeling to determine rate instead of the current 20-year historic data model (many homes near brush did not exist 20 years ago).
- Allow insurance companies to include reinsurance costs in determining rate increases.
- Approve separate wildfire deductibles.
I also encourage you to copy the governor and the insurance ombudsman. Their contact information is below.
Ricardo Lara, California Department of Insurance
Los Angeles Office
300 South Spring Street, 14th Floor
Los Angeles, CA 90013
Main line: 213-346-6464
California Department of Insurance, Office of the Ombudsman
300 Capitol Mall, Suite 1600
Sacramento, CA 95814
Fax Number: 916-492-3649
Thank you for taking the time to help. If enough people make their concerns known, change can happen. If you would like a little more background on this issue, click the link below.