Industry experts point out that California is facing a housing insurance crisis, and a government regulatory agency is proposing recommendations to rebuild the market.
This month, the independent government body, the Little Hoover Commission, released a report listing over ten recommendations for state leaders.
Commission member Janna Sidley, who is responsible for the study, stated in a press release: “The proposed changes described in this report will help ensure that the system better serves California homeowners.”
The report, sent to California Governor Newsom and other state officials this month, proposes 11 reforms to the California housing insurance market, including allowing insurance companies to use catastrophe models to set insurance rates under regulation and public oversight.
According to the report, California is the only state that prohibits insurance companies from using catastrophe models to set insurance rates.
However, reforms are underway. California’s Insurance Department (CDI) Commissioner Ricardo Lara announced on November 14th that the state’s first wildfire catastrophe model regulation has been submitted to the Office of Administrative Law for final approval.
The Little Hoover report also recommends that insurance companies consider homeowners’ risk mitigation measures when underwriting and setting rates, allow insurance companies to include reinsurance costs in rate-setting, improve CDI’s website for easier access to insurance information, define core standards, and adjust requirements to mitigate fire risk and maintain insurability to ensure Californians have access to all housing insurance options and expand plans to help homeowners protect their property from fires.
In recent years, California leaders have increasingly focused on the housing insurance crisis. In September of last year, Newsom issued an executive order directing the Insurance Commissioner to “take immediate regulatory actions to strengthen and stabilize California’s residential insurance and commercial property insurance markets” and “consider whether recent deterioration in the private insurance market provides factual support for emergency regulatory action.”
In a recent speech, Commissioner Lara outlined his proposed “sustainable insurance strategy” for California. He noted that in just 2022, seven out of the top 12 insurance companies in California had stopped or limited new customers, despite CDI approving or pending approval for rate hikes. Some of the major insurance companies include State Farm, Farmers, Allstate, and USAA.
The Little Hoover Commission detailed the crisis further. Commission Chair Pedro Nava stated in a declaration, “For Californians, home is a place of memories, a celebration of holidays, the unfolding of life chapters, and the most important financial investment in their lives,” however, “Too many Californians have been told that their existing insurance will not be renewed, forcing them to seek more expensive alternatives (often with inferior coverage) or even go uninsured.” He said, “This crisis has been brewing for years and deserves timely attention.”
Nava concluded in a letter to state leaders that insurance companies expressed a “sense of urgency to maintain business relationships in this state,” yet they were frustrated by the “unfair regulatory framework” they perceived.
The report from the commission stated, “Insurance companies indicate they are grappling with escalating risks and rising costs, primarily due to ongoing extreme loss risks caused by catastrophic wildfires.”
According to CDI data, Californians hold approximately 8.5 to 8.8 million homeowner insurance policies in recent years, with over 97% underwritten by around 100 private insurance companies, and less than 3% covered by the FAIR Plan (California Fair Access to Insurance Requirements Plan).
The FAIR Plan serves as a safety net insurance policy in California, offering only basic property loss coverage. More and more Californians have had to turn to the plan after being dropped by previous insurance companies. Since 2020, the number of policyholders under the FAIR Plan has more than doubled.
CDI has approved multiple double-digit rate increases for home insurance premiums in the past two years, with the most recent being the double-digit rate hike from USAA approved at the end of October, USAA being one of the major home insurance companies in California specializing in serving military and veteran families.
The Little Hoover Commission stated that despite rate hikes and inadequate coverage, the average price of home insurance for Californians is not higher than the national average.
The report found that relative to the state’s high housing costs, California’s home insurance costs are low and comparable to other states with high-risk natural disasters. For example, in 2021, California’s average home insurance premium was $1,403, while Florida was $2,437, Louisiana was $2,259, and Texas was $2,146. ◇