August 1, 2023
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, Kemper, and many more who are no longer insuring properties. Other companies such as AIG, Oregon Mutual 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 carriers are requiring more loss mitigation by the homeowner such as trimming trees, landscaping and asking for other safety devices to be 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.
Have you heard of the California Fair Plan? They offer a basic fire policy, that provides coverage for the perils of fire, lightning, smoke, windstorm, hail and explosion, and the maximum amount of coverage is limited to $3,000,000 of total insurance. Since the California Fair Plan provides limited coverage’s, we suggest purchasing an additional policy called a Difference in Conditions policy which includes coverages such as water, theft, liability etc.
The solution is simple: the Department of Insurance needs to approve rate increases for the admitted companies so we can get back to a competitive marketplace. 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 homeowners.
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
300 Capitol Mall, 17th Floor
Sacramento, CA 95814
Main line: 916-492-3500
California Department of Insurance, Office of the Ombudsman
300 Capitol Mall, Suite 1600
Sacramento, CA 95814
Fax Number: 916-492-3649
Governor Gavin Newsom
1021 O Street, Suite 9000
Sacramento, CA 95814
Phone: (916) 445-2841
Thank you for taking the time to help. If enough people make their concerns known,
change can happen.