Multiple industry experts are warning that California’s home insurance is in crisis, and prices may continue to rise over the next 10 to 20 years. This is adding insult to injury for homeowners who are already struggling with skyrocketing premiums or difficulty in obtaining insurance.
Since 2023, residents of California have been experiencing changes in the local insurance industry: insurance companies are either pulling out of California or limiting the number of new policies. Rising premiums, policy cancellations, and difficulty in purchasing insurance have become the norm. Particularly after the devastating wildfires in Los Angeles earlier this year, homeowners and insurance companies are facing even more challenging situations.
At a recent expert panel discussion at the California Center for Real Estate (CCRE), Michael Wara, Director of the Climate and Energy Policy Program at Stanford University, pointed out that after the wildfires in Los Angeles earlier this year, many people thought that the current insurance environment was already at its worst, but if a “market-friendly insurance environment” is not created, this dire situation will only worsen.
“I believe that insurance premiums will continue to rise in the next 10 to 20 years, and we must honestly address this issue,” Wara said. He explained that the insufficient measures taken by California to reduce risks such as wildfires are a key reason for the rising insurance costs. “Claim amounts and premiums must be proportional, so if claim amounts increase, premiums will definitely rise as well.”
For example, California’s largest home insurance company, State Farm, is still processing claims for victims of the Los Angeles wildfires in January. To date, the company has received nearly 13,000 related claim applications and has paid out over $4.2 billion in compensation to customers.
Due to the sudden devastating wildfires, State Farm cited severe financial difficulties in February as a reason to request raising insurance rates. According to the approved emergency rate increase notice, effective from June 1st, State Farm’s home insurance rates have temporarily increased by 17%, renters’ home insurance rates have risen by 15%, and apartment rental unit owners have seen a 38% increase in their home insurance rates.
Not only are premiums increasing for homeowners in high-risk areas, but homeowners in low-risk areas are facing the same situation. David Russell, Director of Risk Management and Insurance Center at California State University, Northridge, pointed out that due to the tight insurance market supply, everyone is sharing the burden of rates.
“To ensure underwriting capacity, especially for policies in high-risk areas, insurance companies will inevitably raise premiums for everyone. We are currently facing a cost-sharing issue,” he said. “I live in a low-risk area and have never made any claims, but my premiums have still increased significantly, and these risks are being socialized.”
Unlike other states in the US, California passed Proposition 103 in 1988 to lower insurance rates. This regulation requires insurance rates to be approved by the state government before implementation and prohibits natural increases due to inflation and other issues.
Veteran Chinese insurance brokers in Los Angeles are concerned that if the government continues to overly interfere with the normal operations of insurance companies, it may have a counterproductive effect. Since 2023, factors such as increased wildfire risks and soaring construction costs have become the main reasons for insurers to withdraw or limit policies.
Due to insurers exiting the market either completely or selectively, people who cannot obtain insurance can only turn to the “FAIR Plan” managed by the state government. However, some homeowners forced into this plan express that it is much more expensive and has a narrower coverage scope.
The FAIR Plan, also known as “last resort insurance,” is seen as a costly fire insurance option. As of March this year, over 573,000 policies have been issued through the FAIR Plan, more than doubling in the past two years.
John Norwood, Chief Advocate of the Independent Insurance Agents and Brokers of California, pointed out at the expert panel meeting that the FAIR Plan can only be considered a short-term solution, not a long-term one. Additionally, the plan is currently facing increasingly serious challenges.
Former California Insurance Commissioner Dave Jones explained on EpochTV’s “California Insider” program: “The ultimate result is that the FAIR Plan will have enough funds to pay claims, but it ensures adequate funds by levying charges on all California policyholders.”
In other words, if the FAIR Plan cannot cover all claims, all California homeowners with insurance policies may be forced to make up the difference.