For years, insurers have been pulling out of California due to deteriorating wildfires and growing risks of climate disasters, which have led to increased payouts and associated costs for these companies.
Many insurers revoked fire coverage for thousands of homes and have been refusing to underwrite new policies in the Golden State. As a result, many homeowners affected by the raging Los Angeles wildfires could face rebuilding without insurance payouts.
Insurers like Allstate, Farmers Direct, and State Farm have reduced or completely stopped carrying out business in California.
In 2023, State Farm announced it would halt accepting new homeowners insurance applications in the state. In March 2024, the insurance company decided not to renew coverage for 72,000 California customers, while Farmers Direct announced moving out of the state the year before.
Elsewhere, Allstate stopped underwriting new policies in the state in 2022. Firms like Tokio Marine America Insurance Company and Trans Pacific Insurance Company also disclosed last year they were planning to stop offering homeowners coverage in the state, which would collectively impact over 12,500 homeowners.
According to a Los Angeles Times report last year, many homes in the hard-hit Pacific Palisades neighbourhood were affected when State Farm cancelled policies in 2024. Other insurers even dropped coverage across the state, including low-wildfire-risk zones.
The California FAIR Plan As A Last Resort
The insurance crisis in California compelled many homeowners to rely on the California FAIR plan, a state program formed without taxpayer support.
However, policies issued by the program have relatively higher premiums and reduced coverage, pushing homeowners to buy add-ons like “wrap-around” coverage at additional costs.
Although being the last resort for many homeowners in California, demand for policies offered by FAIR surged as exposure for dwellings surged 61% year-over-year in September 2024 to £372.54 billion ($458 billion). Meanwhile, exposure related to commercial policies almost doubled to £21.63 billion ($26.6 billion) in the same period.
California FAIR announced earlier this week that it has the capacity to handle all claims pouring in due to the widespread wildfires. “The FAIR Plan, which is primarily a catastrophe insurer, is prepared for this and is actively serving customers who have made claims,” the company stated. “The FAIR Plan has payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”
New Insurance Rules Announced Weeks Before The Fires
Two weeks before the wildfires, the California Department of Insurance announced new regulations, offering homeowners in high-risk zones an alternative to the California FAIR program.
The rules would mandate private insurers retake a significant portion of the coverage now managed by California FAIR by underwriting policies in fire-prone regions equal to at least 85% of their market share in the state.
Note that the latest policies also allow insurers to include the costs associated with reinsurance policies for rate calculations. Given that it doesn’t surpass industry standards, they will likely pass on that cost to consumers. Insurers buy reinsurance policies from other companies to hedge risks linked to catastrophic claim events.
The new policy, introduced by State Insurance Commissioner Ricardo Lara, was criticised by the Consumer Advocacy Group, which argued that it would lead to a 40%- 50% rise in insurance rates.
“This new policy is guaranteeing higher rates but not necessarily access to coverage,” said Carmen Balber, executive director of Consumer Watchdog. “The commissioner has granted the insurance industry what it wants. There are so many loopholes and lack of teeth in the rule that homeowners won’t see expanded coverage for a very long time, if at all.”
“We are being realistic about the risks in California,” Lara told CNN mid-week. “We can never get to affordability unless we address the availability.”
