Last year, Allstate, a major property and casualty insurer, halted new homeowner and commercial insurance policies in California, a move that largely went unnoticed until now. Following suit, State Farm announced the cessation of new homeowners insurance applications in the state this week, making it clear that these developments are part of a broader trend rather than isolated events.
California’s insurance landscape is unique. As the only state restricting insurance policies based on historical risk rather than future anticipated risk, it puts insurers in a tight corner. Add to this the escalating risk of wildfires and the soaring construction costs, and it’s evident why insurers are shying away from the Golden State.
Fear not Californians, when your house burns down, you can apply for reparations. https://t.co/rLrwQzSVX9
— Carlos Parra (@CarlosP27531573) June 2, 2023
While this decision can be linked to these factors, it’s important to note that despite facing the same challenges, State Farm significantly grew its market share from 17.6% to 21% during near-successive catastrophic wildfires. This growth hints at the company’s resilience, offering competitive rates despite the growing risks.
However, State Farm’s decision has undoubtedly triggered concerns. Janet Ruiz, a spokesperson for the Insurance Information Institute, highlights the adverse impacts of California’s unique insurance rate formulation rules on insurers. She remarks how these regulations have kept the state’s insurance rates “artificially low” compared to the risks insurers bear, leading to unsustainable business models.
Rex Frazier, president of the Personal Insurance Federation of California, reiterates this view. He states, “Even the insurance giant State Farm cannot ignore the laws of economics,” emphasizing that regulatory policies and extreme weather conditions are at the heart of this issue.
Meanwhile, insurance professionals indicate most of the remaining 115 insurance companies writing residential policies in the state are small. As a result, they may struggle to meet the demand left by these insurance giants. As a result, Californians may have to resort to the California Fair Access to Insurance Requirements (FAIR) Plan. Although more expensive and offering less coverage, this might be the only viable option for many homeowners seeking insurance.
While policymakers in California might argue that their regulations ensure affordable insurance for their residents, the withdrawal of major insurers paints a different picture. It signifies an industry struggling to cope with regulations that disregard emerging realities, such as the escalating threat of climate change and surging costs.
This trend of major insurers exiting the Californian market presents significant implications for residents, investors, and agents who have built careers around these companies. The decisions made by Allstate and State Farm, two of the largest insurance providers in the state, demonstrate that they are not willing to ignore economic realities for the sake of regulation.
The unfortunate reality for many Californians is that, as insurers retreat, the cost of coverage will likely increase, and options will dwindle. This scenario seems inevitable unless California’s regulators are willing to reassess their approach to risk and acknowledge the shifting dynamics of the insurance industry.