Two insurance behemoths have stopped writing new policies in California’s home insurance market, citing increasing wildfire risk and escalating construction costs. State Farm announced that it won’t accept applications for all business and personal lines of property and casualty insurance. This decision did not affect personal auto insurance. State Farm said inflation, the challenging reinsurance market, and rapidly growing catastrophe exposure were the reasons for stopping the policies. Allstate, another insurance giant, announced it would put on hold new homeowners, condo and commercial insurance policies to protect current customers. Unsupported properties in California will suffer as the shortfall of new policies could make purchasing a home quite challenging.
The cost of insuring homes in high-risk wildfire areas has skyrocketed, thanks to climate change-induced California harsh weather and the drying up of the West Coast over the past three decades. Scientists warn that weather conditions will continue to be more extreme and wildfires more frequent and destructive in the future. California’s home insurance market struggles are similar to what Florida and Louisiana have experienced following extensive damage from hurricanes. The fire insurance coverage provided by the California Fair Access to Insurance Requirements Plan (CFAIR) for properties in high-risk areas will face pressure as enrollments surge because some homeowners are going without coverage. The CFAIR works as the insurer of last resort for many who cannot acquire conventional insurance.
The loss of large insurers in California could create more pressure to loosen consumer-minded policies that have kept rates down in the state for years. Proposition 103 is a voter-approved rate regulation enacted in California that allows the state insurance commissioner to reject proposed rate hikes and give refunds. The insurance industry regards it as a limitation on risk pricing and underwriting accuracy. Insurance companies need to get the approval of the insurance commissioner before halting insurance sales to consumers; therefore, State Farm’s decision might not be compliant.
Before releasing public statements, State Farm and Allstate were seeking significant rate hikes. Consumer Watchdog, a nonpartisan advocacy group, said that State Farm’s decision was unlawful. Insurance companies cannot halt selling insurance to consumers to increase profitability. They need to open their books and show them to the state insurance commissioner for approval. There are over 100 companies selling residential insurance in California; however, some offer only limited lines of coverage, such as earthquake or renters’ insurance. The departure of large insurance companies from the market might also cause smaller companies to pull back or shut down.