California’s home insurance market is deeply troubled. A former insurance commissioner said it’s “in chaos.” Insurance Commissioner Ricardo Lara calls it “a real crisis.” Using more colorful language, the president of a Los Angeles agency told The San Francisco Standard that “if there’s a major event” before the market is fixed, “we are in deep doo-doo.”
The muddle became even messier when State Farm announced in March that beginning on July 3, the company would, on a “rolling basis,” decline to renew “approximately 30,000 homeowners, rental dwelling, and other property insurance policies.” It will also “withdraw from offering commercial apartment policies with the non-renewal of all of those approximately 42,000 policies.”
Those able to keep their State Farm policies were hit with 20 percent rate increases.
The company has policyholders in all 50 states, but it’s California that seems to be dominating its business decisions. Almost a year earlier, citing “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” State Farm said that it was done with offering new policies to “all business and personal lines property and casualty insurance” in the state.
Allstate has also said it was quitting. “New homeowners, condo and commercial insurance policies” are on pause as “the cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums.”
Farmers Insurance has soured on California, as well, with affiliates dropping 100,000 customers across the state, including those who insured their autos through the company.
Over the longer term, seven of the top 12 insurance companies that had been doing business in California “have either stopped writing new policies or restricted them,” E&E News reports.
And it’s not just California’s problem anymore. The “deep doo-doo” has seeped into the Nevada side of Lake Tahoe, where, reports the San Francisco Chronicle, “increasing numbers of homeowners are facing insurance nonrenewals and soaring premiums — and few if any insurers willing to write new policies.”
The companies cite the risks associated with wildfires (which California has done little to prevent) and steep rebuilding costs. Further complicating matters is the state government’s control over the market. The meddling makes it difficult for insurers to raise their rates to offset their exposure. For years, insurers that “do business in California have been forced to sell insurance at below-market rates, guaranteeing they will lose money,” says Jerry Theodorou of the R Street Institute.
While it’s more likely that the crisis will simply accelerate the exodus of people from California and discourage homebuilding, it’s not out of the question that it will increase homelessness as it pushes the cost of owning a home to new heights.
Jim Vargas, president and chief executive of Father Joe’s Villages, a homeless services charity in San Diego, told the New York Times that the organization’s rising property insurance premiums could “derail not only our plans as a homeless services provider and developer from constructing additional buildings, but it could derail, frankly, the plans for housing in general to be developed in this state.”
Policymakers, who never sit idle in California – though the state would be better off if they were less energetic – are scrambling for solutions. Lara has introduced a “Sustainable Insurance Strategy,” which the Los Angeles Times characterizes as “the biggest overhaul of industry regulations” since 1988’s Proposition 103 “gave an elected insurance commissioner the authority to review and reject requests for rate hikes by insurers.”
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Under this plan, carriers could pass on to their policyholders the cost of the reinsurance they buy to protect themselves. They could also “use computer models that project future claims risks” when they request rate hikes rather than rely on the historical data they’ve been tied to.
Another effort, this one proposed by Gov. Gavin Newsom, is a bill that “tightens the timeline” of the Insurance Department review process in response “to insurer rate-review requests.”
Meanwhile, insurers flee the state, and with each loss, competition, which pressures prices downward, fades. Will the market ever reach the point to where there is no market and the insurer of last resort, the government-created, “already overstressed,” “barebones coverage” Fair Access to Insurance Requirements Plan, is the sole option?
The only useful solution is one that will allow insurers to charge market rates. As with most problems in California, the remedy is less, not more, involvement from lawmakers.
Kerry Jackson is the William Clement Fellow in California Reform at the Pacific Research Institute and the co-author of the forthcoming PRI book, The California Left Coast Survival Guide.