Insurers drop the flame on California homeowner policies

As insurers decide to stop renewing their homeowner’s insurance policies in 2024, agencies point to California’s wildfire season as the tipping point leading to this decision.(Scott on AdobeStock)

State homeowners face burning issue with diminishing coverage as wildfire risks lead to statewide insurance crisis; Insurance Commissioner issues strategy to remedy the gaps

SACRAMENTO – Last October, the San Francisco Chronicle reported that four small insurers – Merastar Insurance Co., Unitrin Auto and Home Insurance Co., Unitrin Direct Property Co. and Kemper Independence Co. – would not renew homeowner insurance policies in California in 2024.

The four companies are subsidiaries of Kemper Corporation. And while it is true the four may not be household names, their decision to stop issuing homeowners insurance reflects a growing trend in California – companies big and small are no longer renewing existing homeowner policies or issuing new ones.

In 2022, State Farm Insurance was the largest writer of property and casualty insurance policies in the state. In May 2023, citing wildfires, construction costs and difficulties with reinsurance – insurance that is purchased by insurance companies to reduce risk – State Farm stopped writing homeowner policies. Allstate also stopped issuing policies earlier in the year.

Farmers Insurance Group, second behind State Farm in market share, capped the number of policies it wrote in California last year.

According to a report from the California Department of Insurance (CDI), in 2015, insurance companies either cancelled or did not renew 182,000 homeowners and dwelling fire policies in California. In 2021, insurers either cancelled or did not renew 241,662 policies.

For a local perspective on the matter, Jordan Mulrooney is an RE/MAX realtor in Visalia. He has been selling real estate since 2016.

Mulrooney said his experience with selling homes in Visalia and adjacent areas – the Valley floor – is different from that of realtors selling homes in mountainous areas, such as Three Rivers and Springvale.

“For me, here, the homeowners insurance issue is more of a pain,” he said. “But in the high-fire areas? It can be extremely difficult. You’re just not having any chance at all for insurance. People I know are actually having their policies not renewed. When it comes time to renew, they get a letter that says: ‘Hey. You’re no longer covered. You have so many days to find new insurance.’”

RELENTLESS

State Farm, Allstate, Farmers and other insurers point to the fires in 2017 and 2018 as the tipping point for their decision to stop writing or renewing policies.

In 2017, there were over 9,500 wildfires in California. The fires burned 1,548,429 acres, destroyed over 10,000 buildings and caused over $18 billion in damages. In 2018, the state experienced over 8,500 fires. There were 103 fire-related deaths. Over 24,000 structures and 1,975,000 acres burned – roughly 2% of the state’s land.

As bad as the 2018 fire season was, it ranks third behind 2020 and 2021. The 2020 fire season is the worst fire season in the state’s history. In 2020, there were over 9,900 fires. These burned nearly 4,000,000 acres – more than 4% of the state’s 100 million acres of land.

In 2021, there were nearly 7,400 wildfires in California, which consumed 2,569,386 acres and destroyed over 3,800 structures. Three firefighters lost their lives battling the fires.

Mulrooney said the April 21, 2021 Three Rivers Fire altered the landscape for insurers. The fire burned for two months and consumed over 5,800 acres. Following the fire, he said insurers took a much more active interest in how homeowners maintained their properties.

“They may ask Cal Fire to come out and do a defensible space check to make sure the property is not full of debris,” he said. This is also called fire hardening.

Ultimately, Mulrooney said the issue boils down to profit.

Referring to the Three Rivers Fire, Mulrooney said, “It never hit home until Three Rivers. That really hit home around here.”

Following that fire – and coming on the heels of the fires in 2017 through 2020 – Mulrooney said that the conversations he had with insurance brokers focused on profit and loss.

“They told me for every $1 they receive in premiums, they’re paying out $1.25,” he said. “They’re losing money.”

THE FAIR PLAN

California has an option for individuals who cannot obtain homeowner policies through conventional means.

The FAIR Plan is a state plan that is, according to a DIC press release, “California’s insurer of last resort.” The Department describes it as a bare-bones residential policy that covers fire and smoke damage. FAIR customers must purchase a separate policy to cover liability, water damage and other “common perils.”

On Nov. 27, 2023, a Los Angeles Superior Court judge upheld DCI Commissioner Richard Lara’s order that the FAIR Plan must offer a more comprehensive policy and close coverage gaps.

In the release, Lara said, “While we continue to pursue long-term insurance solutions to safeguard California’s climate change, it’s essential that homeowners have a strong short-term option in the California FAIR Plan.”

Despite Lara’s optimism, Mulrooney said the FAIR Plan can represent a hurdle for many individuals hoping to obtain insurance.

“What I have heard is FAIR makes you go through all the channels first,” he said. “They want to make sure you have exhausted all options before you jump onto the FAIR plan.”

STATE REMEDY

During a Sept. 21, 2023 press conference, Lara unveiled his “Sustainable Insurance Strategy.”

According to the release that accompanied the conference, the strategy represents the largest insurance reform since Proposition 103 was passed by voters 35 years ago.

The key regulatory elements of the strategy include transitioning FAIR Plan subscribers back to the traditional insurance market. According to Lara, insurers must commit to providing coverage in all parts of the state, and have to agree to cover at least 85% of their business in areas where there’s a high risk of wildfires.

FAIR Plan policyholders who comply with the state’s Safer from Wildfires regulation will have priority for transitioning to market.

Other elements include improving rate filing procedures and deadlines; hiring additional CDI staff to review rate applications; and enacting reforms to increase transparency and encourage public participation in the process.

Lastly, the strategy orders changes to the FAIR plan to prevent it from going bankrupt in the case of an extraordinary catastrophic event. These changes include building the plan’s reserves and its financial safeguards.

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