Update on California Homeowners Insurance

| December 6, 2023 | 0 Comments

According to CalFire, roughly 1.6 million acres have burned over the past five years in California. As a result of mounting losses from the increasing wildfire risk, many property insurers have either stopped renewing policies or are limiting their new policies to lower risk areas. Even homeowners in areas rated moderate fire risk have found it increasingly difficult to find insurance that will cover fire damage. They’ve been hit with skyrocketing premiums or even outright rejection. According to the California Department of Insurance (DOI), non-renewals of home and fire insurance policies have been on the rise, up to 13 percent of policies in 2021.

The California FAIR plan was established in 1968 to provide homeowners with insurance when they couldn’t obtain coverage in the traditional insurance marketplace. There was an average of about 141,000 homeowners enrolled in FAIR before 2018. Since then, enrollment has grown to more than 330,000, according to CalMatters.org. Even FAIR’s highly regulated premiums are set to jump by more than 15 percent next year, but that’s just a fraction of the 80 percent increase that FAIR requested two years ago because of the jump in costs and new policies.

Insurers point to some issues with California’s Insurance regulations. Prop 103, passed by voters in 1988, required regulation of insurance policies. Current state regulations include limitations on the kinds of risk models’ insurers can use to set rates and limitations on how much of their costs can be passed on to California policyholders. Insurance companies also complain about long and complex approval process for rate increases or policy changes.

One final contributing factor has been inflation. Not only have wildfires caused record claims for insurers, but the cost of rebuilding has skyrocketed with inflation during the past three years. Because of this toxic brew for insurers, companies like State Farm, Allstate, Farmers, USAA and others have all halted or restricted issuing new policies in California.

The DOI is working to revise existing regulations. Proposed changes would allow insurers to use future prediction models instead of just historical risk models to set their policy rates. It would also allow them include their own reinsurance costs (insurers sometime buy insurance for their own risks) which are currently not allowed.

But these changes will take time to implement. The State Legislature recessed without being able to agree on a fix for the current crisis. Governor Newsom has issued an executive order directing changes, but between industry and public comment periods, the DOI estimates it could be December 2024 before the new regulations are fully implemented and homeowners start to see any relief.  

And it’s not entirely clear that consumer will be much happier with the results. Consumer watchdogs note that states with less regulation aren’t necessarily better off. For example, hurricane-prone Florida’s average homeowner’s insurance premium of $2,165 is almost 70 percent higher than California.

In the meantime, homeowners in California will continue to face reduced competition and fewer choices, and likely much higher premiums in the future.

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.

Category: Government, Housing, Local News, Real Estate

About the Author ()