California Insurance Commissioner Ricardo Lara expressed concerns over the current insurance crisis in the state, stating that some people are unable to obtain homeowners insurance no matter what and others are losing their coverage even without filing any claims. In response to these challenges, the California Department of Insurance is undertaking the largest insurance regulatory reform in over thirty years, with the aim of attracting insurance companies back into the California market by the end of the year.
The insurance industry in California has been in a stalemate since mid-last year, with major insurance companies either pulling out of the state or limiting the number of new policies, a situation that has yet to improve. Commissioner Lara addressed this issue during a meeting held by the California Association of Realtors on July 24, emphasizing that the state is facing an insurance crisis. He cited a recent survey showing that nearly 7% of real estate transactions in the state were forced to terminate due to insurance-related problems.
The root of this crisis, according to Lara, lies in outdated insurance regulations in California and longstanding issues that have been ignored for decades. Unlike utilities, insurance companies are not legally obligated to provide coverage to everyone, a restriction set in the Proposition 103 passed over thirty years ago. Lara noted that this regulation failed to account for factors like rising costs due to climate change, necessitating comprehensive reform.
Climate change and cost increases have indeed been major reasons prompting insurance companies to exit the California market. Starting from May last year, prominent insurers like State Farm and Allstate announced they would no longer offer new homeowners insurance in California. Farmers Insurance, the second-largest insurer, and others followed suit by limiting new policies or completely withdrawing from the state, including canceling existing policies.
State Farm cited reasons such as historic increases in construction costs surpassing inflation, escalating disaster risks, and challenges in the reinsurance market for their market exit. The passage of Proposition 103 in 1988 aimed to curb insurance rates in California, requiring approval from the state government before rates can be implemented and preventing natural rate hikes due to inflation and other issues.
Commissioner Lara noted that overall rates in California are still lower than states like Texas and Florida. However, with the continued rise in wildfire and winter storm risks in California, many insurance companies are hesitant to underwrite new policies. With various considerations in mind, Lara stated that they anticipate completing all necessary reforms by December 2024. State Farm, the largest insurance company in California, expressed willingness to take on more policies statewide if reforms are initiated.
Moreover, once California implements these reforms, more insurance companies are expected to reenter the market, with some pledging to offer new coverage to 85% of residents in wildfire-prone areas. The changes in the insurance industry have left many individuals struggling to secure coverage. In light of this, Commissioner Lara offered three pieces of advice.
Firstly, plan ahead, especially if there are limited options available or if the property is located in a high-risk wildfire area or not up to current safety standards. Lara emphasized the vital role insurance plays in real estate transactions, stating that difficulty in obtaining coverage can discourage potential buyers. Some properties may require renovations before sale to increase the chances of securing insurance.
Secondly, consult with multiple professional insurance brokers to inquire about coverage options in the market beyond those you have previously contacted. Lara suggested using the state government’s website to find brokers in your area, noting that some may only work with the top five insurers and may not be familiar with smaller or mid-sized companies still offering coverage.
Lastly, Lara advised against settling for the mandatory FAIR insurance plan enforced by the state. While it may meet mortgage application requirements, it is often expensive and provides only basic coverage. FAIR insurance can serve as a last resort for those unable to find coverage elsewhere, but Lara recommended continuously searching for conventional insurance and immediately switching once feasible.