What measures are California lawmakers taking to ensure state residents have access to affordable insurance policies?
The California insurance market has been rocked by the sudden departure of several major firms as escalating wildfire and other catastrophic risks make a difficult market even more challenging for some carriers. The financial troubles of California’s biggest auto and homeowners insurer, Mercury Insurance, have been a major contributor to the declining market, with the firm announcing it will exit the state beginning in March 2021.
The withdrawal of Mercury from the market leaves a gaping hole, and is a major setback for consumers in California. With Mercury’s departure, California drivers may experience higher auto insurance rates since the company was able to keep premiums lower with its vast network of insurers. This sudden departure will also increase competition between remaining carriers, resulting in higher prices for insurance.
The exit of major insurers from the state has also been caused by the recent wildfires, which have devastated communities in California over the last few years. Large payouts, some nearing $1 billion, have made the already challenging market for insurers much more difficult. Catastrophic risks such as floods, hurricanes, and earthquakes have also taken a toll on the state’s insurance market, resulting in some insurers deciding that continuing to offer coverage in California is not worth the risk.
In light of this market turmoil, California lawmakers are looking for ways to ensure state residents have access to affordable insurance policies. Recently introduced legislation seeks to limit the amount companies can charge auto and homeowners insurance customers, and reduce the market’s reliance on catastrophic events. Plans have also been developed to fund the state’s own insurer, the California FAIR Plan, with additional resources to help cover the uninsured and underinsured.
California’s insurance market is struggling in the wake of Mercury’s departure, and the state’s lawmakers are scrambling to find a way to address the crisis. With more firms beginning to exit the market and the risk of major natural disasters on the rise, Californians could be feeling the effects of this shifting landscape for years to come.
ys financial strength.”
Allstate, another insurance powerhouse, announced in November it would pause new homeowners, condo and commercial insurance policies in California to protect current customers.
“The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums,” Allstate said in a statement.
California’s unsettled insurance market is a reflection of the current climate crisis, with companies across the country boosting rates, limiting coverage or pulling out completely from regions susceptible to wildfires and other natural disasters. Florida and Louisiana have struggled to keep healthy insurance markets following extensive damage from hurricanes. Premiums are rising in Colorado amid wildfire threats, and an Oregon effort to map wildfire risk was rejected last year due to fears of skyrocketing premiums.
Scientists say climate change has made the West warmer and drier over the last three decades and will continue to make weather more extreme and wildfires more frequent and destructive. In recent years, California has experienced the largest and most destructive fires in state history.
The shortage of new policies could make it more difficult to buy a home, and the state-run pool that serves as the insurer of last resort for many could face pressure as enrollments surge. The California Fair Access to Insurance Requirements Plan provides basic fire insurance coverage for properties in high-risk areas when traditional insurance companies will not. Enrollments have jumped in recent years to 272,846 homes in 2022.
“We just don’t have a stable insurance market,” said state Sen. Bill Dodd, a Democrat from Napa, whose Northern California district has been charred by wildfires. “What’s happening is a lot of people in my district and frankly other districts are … going naked — they have no insurance.”
The consequences of the climate crisis are becoming increasingly clear, with California having more than 1.2 million homes at risk for extreme wildfire, far more than any other state. “The number of acres burned in California has grown steadily in recent years, as more people are moving into fire-prone areas of the state,” the Insurance Information Institute said in a statement on the company departures from California. “More homes in harm’s way — combined with rising costs of repairing or replacing houses either damaged or lost to fire — leads to increased insured losses.”
In Colorado, which has been hit by devastating wildfires, insurance premiums have been rising significantly, and some smaller insurance companies have been pulling back from covering properties. A study commissioned by state lawmakers found that 76% of carriers decreased their exposures in Colorado in 2022, leaving the five largest insurance companies to dominate the market.
Florida has struggled to keep the insurance market healthy since 1992, when Hurricane Andrew flattened Homestead, wiped out some insurance carriers and left many remaining companies fearful to write or renew policies in Florida. Risks for carriers also have been growing as climate change increases the strength of hurricanes and intensity of rainstorms.
Louisiana is in the midst of an insurance crisis, exacerbated by hurricanes Delta, Laura, Zeta and Ida in 2020 and 2021. As claims piled up, companies that wrote homeowners policies in the state went insolvent or left, canceling or refusing to renew existing policies.
In California, the loss of large insurers could create more pressure to loosen consumer-minded policies that have held down rates in the state for years. Voters approved Proposition 103 in 1988, which allows the state insurance commissioner to reject proposed rate increases and order refunds. It has been credited with saving consumers billions of dollars, but the industry says it places constraints on accurate underwriting and pricing risk.
Last year, Insurance Commissioner Ricardo Lara advanced regulations requiring insurers to give discounts to customers if they followed new standards like building fire-resistance roofs and creating defensible space around their homes.
Before their announcements, State Farm and Allstate both had been seeking significant rate increases.
Consumer Watchdog, a nonpartisan advocacy group, said State Farm’s decision was unlawful.
“Insurance companies can’t just stop selling insurance to consumers in order to make more money for themselves,” Harvey Rosenfield, the author of Proposition 103 and the founder of the group, said in a statement. “They have to open their books and get the (state) insurance commissioner’s approval.”
Lara’s office didn’t respond to an email request for comment.
A state website lists more than 100 companies selling residential insurance, though some offer only limited lines of coverage, such as earthquake or renter insurance.
The consequences of the climate crisis are becoming increasingly clear, with California’s unsettled insurance market a reflection of the current climate crisis. Companies across the country are boosting rates, limiting coverage or pulling out completely from regions susceptible to wildfires and other natural disasters. Florida and Louisiana have struggled to keep healthy insurance markets following extensive damage from hurricanes. Premiums are rising in Colorado amid wildfire threats, and an Oregon effort to map wildfire risk was rejected last year due to fears of skyrocketing premiums.
The shortage of new policies could make it more difficult to buy a home, and the state-run pool that serves as the insurer of last resort for many could face pressure as enrollments surge. Consumer Watchdog, a nonpartisan advocacy group, said State Farm’s decision was unlawful.
“We take seriously our responsibility to manage risk,” State Farm said. “It’s necessary to take these actions now to improve the company’s financial strength.”