The Homeowners insurance situation in California has not been good. Following a surge in wildfires (over 1.5 million acres have burned in the past five years, according to CalFire) property insurers have faced mounting losses. Many either stopped renewing policies or are limiting their new policies to lower risk areas. Even homeowners in lower fire risk areas 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% in 2022.
How we got here
The California FAIR plan was established in 1968 to provide homeowners with insurance when they couldn’t obtain coverage in the traditional insurance market. Over the years, enrollment has grown to more than 330,000 homes, according to CalMatters.org. FAIR’s highly regulated premiums are set to jump by more than 15% next year, but that’s just a fraction of the 80% increase that FAIR requested two years ago because of increased costs.
Insurers point to some issues with California’s Insurance regulations. Prop 103, passed by voters in 1988, required increased 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 processes 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.
FAQS
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State efforts to improve the situation
The California Department of Insurance 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 to 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 consumers 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% 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.
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What you can do
As renewal time nears, you should receive notification from your insurer. This will determine what happens next. You may find the premium has gone up substantially. Or you may be informed that the company is declining to renew your policy.
In either case, you should consult with an insurance broker you trust. Don’t panic, say the pros. “There are still a lot of insurers who will insure your home,” says San Diego insurance broker Sarah Paulson. However, when shopping for a different policy, it’s important to be careful. Some insurers may offer a better price, but with weaker coverage. Further, insurers often require a home inspection, which may result in a requirement to do things to your home you’re not willing to do, such as removing landscaping.
Finally, though a California FAIR policy may offer a better rate than a standard policy, it typically is also a drastic downgrade in coverage. With FAIR policies, fire coverage is a separate policy than the other coverages, and this can be a big issue especially for high value homes. “California FAIR plan policies should be viewed as a last resort,” says Sarah. “There are often better alternatives.”
ACCREDITATIONS & AWARDS
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Other advice from Sarah:
- Avoid making minor claims on your policy- if you make minor claims on your homeowners’ insurance, the company may be more likely to decline to renew your policy.
- Consider increasing your deductibles- Increasing your deductibles can help offset the increases in premiums we’re likely to see.
- Increase your home’s fire resilience-reduce flammable brush and foliage near your home (as allowed by local regulations). Consider improvements like boxed gutters, fire-resistant walls, and roof materials.
At Blankinship & Foster, we help you make sound decisions across the whole spectrum of your finances. Contact us to learn more about how we can help you achieve Confidence, Clarity, and Direction in your finances.
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