Will the loss of insurance carriers lead to a coverage crisis in California?
Californians now have even fewer insurance carriers to choose from, following a recent announcement from Farmers Insurance.
The company stated it saw a spike in applications for homeowners insurance and as a result will be limiting the number of new homeowners policies in the state, effective July 3.
State Farm and Allstate had already announced that they would stop writing new policies.
While there are more than 100 insurers still operating in California, concern is mounting that future withdrawals could lead to a broader insurance crisis. State Farm and Allstate said existing policyholders are not affected.
Allstate stopped writing new homeowner, condominium and commercial insurance policies in California as of last month, after quietly “pausing” new policies in 2021.
State Farm, the largest homeowner insurer in California, announced a similar cutback for new property and casualty insurance May 27. The company reported a net loss of $6.7 billion in 2022 compared to $1.3 billion of net income in 2021.
Farmers said starting this week, it'll cap the number of new homeowners policies each month.
California is the largest insurance market in the nation, and fourth largest in the world. A growing industry concern is whether wildfire claims will cut too deep into required capital reserve limits, and also whether insurers have expanded coverage in the state beyond their ability to serve such a large market.
These pullbacks and concerns come on the heels of similar actions in 2022 when home insurer American International Group Inc.’s Private Client Group and Chubb Ltd. announced they would no longer write new policies for multimillion-dollar homes in rural, unprotected California areas due to catastrophic events.
In October 2017 alone, more than 5,300 Sonoma County families and homeowners lost houses and nearly everything they owned in the deadly Tubbs Fire, just one of several North Bay firestorms that month that included the Kincade, Nuns and Glass fires. More than 4 million acres burned in California in 2020, Cal Fire reported.
GEICO shuttered its 38 statewide sales offices during the summer of 2022, while continuing to offer policies online or by using the firm’s mobile app.
Angst over insurer rate hikes
A key reason for these cutbacks is due to the alleged inability of insurers to raise or adjust insurance prices quickly. That’s because of state regulations and other market forces, such as the cost of construction and rebuilding due to wildfires and inflationary pressures along with drought and other climate threats.
“We are in a challenging period. Anxieties associated with wildfires and political issues are keeping insurance rates low, along with the lack of the state’s ability to use forward-looking models that insurers believe should be utilized to help determine a proposed new rate structure,” according to Amy Bach, executive director of United Policyholders in San Francisco.
She said carriers rely on historical weather data to propose rate hikes beginning at the 6.9% level automatically allowed without stringent regulatory review and hearings.
Janet Ruiz with the Insurance Information Institute said the California Senate Insurance Committee is considering several potential rule-making changes. She said this committee knows the industry wants to shorten intervention and approval processes and sees the need for new technology to look ahead to potential risks from climate change.
Ruiz observed that there are many scientific ways to look at potential risks. Among them: using wind tunnel analyses to see how fire and embers travel, slope and hill contour assessment, Doppler radar comparisons and long-range forecasts focusing on the likelihood of extreme weather — such as summer droughts, high heat and cold, and wet winters — to factor into the rate-making process.
“Now the whole insurance market is having problems covering higher claim levels in excess of allowed premiums that go back five years or more,” Bach said.
The insurance industry has three chief concerns, according to Bach. Under Proposition 103 they can’t use future-looking tools (such as Artificial Intelligence property analysis techniques, etc.) to anticipate the need for higher rates down the road.
“In addition, insurers also are not permitted to pass along rising reinsurance costs and are not happy with California’s rate regulation policies. Insurers say the state has not been giving them rate increases they want and need to make a profit,” Bach said.
Proposition 103, passed by California voters in November 1988, requires "prior approval" before insurance companies can implement property and casualty insurance rates above 6.9% without the possibility of intervention.