Property Owners May See an Increase in Homeowner’s Insurance

Wildfires are a concern to Pacific Palisades residents. Purchasing fire insurance can be a problem.

Wildfires have always been part of life in California, going back to the indigenous tribes who lived here.

According to the National Park Service, Native Americans, Alaska Natives, and Native Hawaiians used fire to clear areas for crops and travel, to manage the land for specific species of both plants and animals, to hunt game, and for many other important uses. Fire was a tool that promoted ecological diversity and reduced the risk of catastrophic wildfires.

At some point, California prohibited controlled burns, let people build in the wildlife interface, and allowed electrical companies to place wires and poles, which should have been routinely checked, but weren’t.

Pacific Gas & Electric was found responsible for the 2018 Camp Fire in northern California that killed 85 people. The disaster was caused by downed power lines.

Of the top 20 most destructive wildfires in state history, 14 have occurred since 2015, according to the California Department of Forestry and Fire Protection. Some blame forestry management, others blame climate change.

One result of the destructive fires is insurance companies are pulling out of California. Seven of the top 12 insurance companies have either paused or restricted new business in the state.

Pulling out of the market are AmGUARD and Falls Lake. Allstate said last November it would not issue new policies and State Farm said the same in May.

Farmers and USAA are limiting new polices. AIG left in early 2022, Chubb Ltd. started its non-renewal policy in 2019.

“Insurance companies are not utilities required by law to cover all residents. Insurance companies will not write insurance, especially in high-risk areas, unless they are able to cover the related claims and expenses and earn a fair return,” said Michael Soller, California deputy insurance commissioner in an August 22, North Bay Business Journal story (“Two More Carriers Stop Insuring California Homeowners”) “It benefits no one if an insurance company goes insolvent because it did not have enough access to capital to cover 100% of its claims.”

Although insurance companies are leaving the state, it is estimated there are still about 100, which will provide homeowners insurance – and there is the FAIR plan (Fair Access to Insurance Requirements).

Some blame Proposition 103, which California voters passed in 1988, for the insurance exodus.

That proposition requires insurance companies to get prior approval before raising premiums by opening their books to public scrutiny to prove they need a rate increase. Companies are permitted to charge enough to cover projected claims, reasonable expenses and earn a fair profit.

Companies also cannot set rates by considering current or future risk to properties, they can only consider historical data. Insurance companies also buy insurance, known as reinsurance—but that cannot be considered when setting rates for California homeowners.

People with mortgages are generally required to have insurance. Some of those Californians, when they can’t get a major insurer, turn to the FAIR plan, which was established in 1968, following the riots and brush fires of the 1960s.

FAIR became the state’s insurer of last resort, providing access to fire coverage for California homeowners unable to obtain it from a traditional insurance carrier.

The FAIR Plan is a syndicated fire insurance pool of all licensed property/casualty insurers that write basic property insurance. Each member company participates in the profits, losses and expenses of the Plan in direct proportion to its market share.

According to Cal Matters, between 2018 and 2022, the number of homeowners covered by the FAIR Plan doubled to roughly three percent of homeowners. If the FAIR plan runs out of money, legally, it must levy a surcharge on major insurers.

During the final weeks of this past California legislative session in September, insurers asked for a more flexible rate-setting process. Consumer groups challenged it, and the process stalled.

At a September 21, news conference, California Insurance Commissioner Ricardo Lara said the state will write new rules to let insurers look to the future when setting their rates.

His proposal could mean higher rates for homeowners who are already seeing dramatic increases. Eight insurance companies doing business in California have requested rate increases of at least 20% or higher this year, according to the California Department of Insurance.

At Lara’s press conference, Denni Ritter, vice president for state government relations said “California’s 35-year-old regulatory system is outdated, cumbersome and fails to reflect the increasing catastrophic losses consumers and businesses are facing from inflation, climate change, extreme weather and more residents living in wildfire prone areas.”

Consumer Watchdog, a nonprofit said Lara a made a behind-the-door closed deal that “will allow the insurance industry to raise home insurance premiums for 8.7 million Californians.”

Consumer Watchdog supports the creation of a public model that will comply with Prop. 103’s transparency requirements. State agencies must notify the public of proposed regulations, hold public hearings and allow the public extensive opportunity to comment on them.

“Proposition 103 authorizes consumers to go to court to make sure its protections are properly enforced and obeyed by insurance companies and the Commissioner,” according to Consumer Watchdog.

Photographer Lesly Hall captured this shot of the 2021 Palisades Fire around on May 16 from Chastain Parkway in the Palisades Highlands.

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3 Responses to Property Owners May See an Increase in Homeowner’s Insurance

  1. Betsy Handler says:

    Hello. There’s a basic inconsistency here. You write that “Companies are permitted to charge enough to cover projected claims, reasonable expenses and earn a fair profit.

    Companies also cannot set rates by considering current or future risk to properties, they can only consider historical data.”

    If companies can set rates only by considering historical data, why are they permitted to charge enough to cover projected loses? Seems to me that “projected loses” fall under the rubric of current or future risk.

    Furthermore, I’m not aware of any recent historical data on fires in the Alphabet Streets. Why are homeowners rates in this area going up too?

  2. Jim McCashin II says:

    After 40 years of bundling all of my insurance with Farmers, my homeowner’s policy was DOUBLED this year from $4k to $8k. I live only a few blocks west of PaliHi. Goodbye, Farmers.

  3. Adam Glazer says:

    Hi everyone. I’m a Palisadian, former Chamber of Commerce a president, and have been an insurance agent for 14 years. Unfortunately the CA insurance market has practically collapsed. Many of the major carriers are not writing new policies. The CA Department of Insurance did not allow carriers to increase rates for 3.5 years (prop 103 is really the trigger of all of this as it finally has caught up to modern day) so while inflation went crazy, the cost of labor and materials skyrocketed, and claims continued to skyrocket, carriers were not allowed to keep up. Carriers have been paying out between $1.05-$1.30 for every dollar brought in. That’s obviously an unsustainable business model. Unfortunately it’s only going to get worse and probably will be this way for at least the next 12-18 months. Rates are going to skyrocket. People will be non-renewed. It will be much harder to get insurance and has been for the last 6 months or so. I wish I could say I see an end in sight but more carriers are pausing to write new business every week. The hope is MAYBE 2025 when we start to see the market come back.

    Also, while rates are going to go up (a lot), be careful switching because if you do and a new carrier comes out to inspect the property and not like something, they could cancel you and then you may not have any options to go back to other than the (last resort) CA Fair Plan. These are conversations I am having with clients, prospective clients and anyone that wants to discuss the state of the insurance market in CA at this time.

    With that said, please feel to reach out anytime with questions. My email is adam.glazer@comparioninsurance.com. Always happy to help in anyway that I can.

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