Real Estate

California looks to change rules for homeowners insurance carriers

Under the new rules, insurers would be able to consider future risk to a property when issuing a policy

Homebuyers and homeowners in California have a reason to celebrate. The state’s top insurance regulator announced last Thursday that new rules are in the works to persuade insurers to remain in the state.

Over the past 12 months, seven of the 12 largest insurance companies by market share in California have either paused or restricted new policies in the state, highlighted by the departures of State Farm and Allstate in early June 2023.

In announcing their departure from the Golden State, the two major insurers cited the increased wildfire risks in the state and rising construction costs.

“State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” the company wrote on its website.

Due to these departures, the California FAIR Plan, the state’s insurer of last resort, has seen enrollment double over the past few years.

Since 1988, through the passing of Proposition 103, insurance companies in California must obtain permission from the state Department of Insurance to raise insurance rates. When setting rates, insurance companies cannot consider current or future risks to the property or reinsurance costs.

Because of these rules, homeowners insurance firms can only base rates off of historical data, which poses a challenge due to climate change.

Since the start of 2023, CAL FIRE and the U.S. Forest Service have recorded 5,601 wildland fires in the state, scorching a total of 275,058 acres. 

Under the new rules proposed by Ricardo Lara, California’s insurance commissioner, insurers would be allowed to consider climate change when setting their rates. Lara also noted that he is considering rules that would let insurers factor in some of their reinsurance costs as well.

However, insurers would still have to obtain permission from the state to raise their rates.

“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market,” Lara said in a statement.

“The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”

According to Lara, the state will only allow companies to use these new rules if they write more policies for people who live in areas threatened by wildfires. This means that companies must write policies in wildfire risk areas of at least 85% of their statewide market share.

In other words, if a company insures 20 out of 100 homes, they will also have to write 17 policies for homeowners in an area threatened by wildfires.

While Lara believes these new rules will help improve consumers’ access to homeowners insurance, others are concerned that these changes will result in massive premium price increases.

Consumer Watchdog, an advocacy group, has noted that similar rate modeling and reinsurance practices have led to insurance premium costs to rise drastically in Florida. Additionally, others are concerned that the new rules would exaggerate the risk for insurance companies, resulting in unnecessarily high rates.

However, Paul Scalone, a San Diego-based Compass agent and the owner of Dignified Insurance Services, disagrees.

Scalone believes the new rules will ensure more insurance providers are active in California, creating a competitive marketplace. This will help stabilize costs.

“More carriers in the marketplace is always a good thing for consumers,” Scalone said. “The hope is that more carriers will reenter the marketplace because an agreement is finally on the table. I think it is a step in the right direction, but these conversations need to continue to happen with the Department of Insurance and the carriers.”

According to Scalone, on average, for every dollar insurance carriers charge in premiums, they pay out $1.13 in claims.

“That is not a sustainable model,” Scalone said.

Despite his overall positive outlook on the situation, Scalone did note that four of the state’s largest homeowners insurance carriers have price increase requests filed with the state that average around 32%.

“The cost is going to continue to go up and as far as the carriers are concerned, it needs to, but they are not going to be able to just pick out a number and charge that for insurance; it still has to be approved by the state,” Scalone said.

The new rules are not expected to be finished until December 2024. Still, Todd Armstrong, a California-based Compass agent, is optimistic.

“Right now, insurance is the first call we make when writing an offer to make sure the property is even insurable, and these new rules are definitely going to help,” Armstrong said.

“Consumers see all of these companies leaving, so this should give them some comfort that they’ll be able to get insurance.”

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