Insights & indicators Wildfires, inflation, pandemic send insurance rates soaring

Inflation, a labor shortage, effects from the lingering COVID-19 pandemic and increasingly devastating fires are boosting the cost of insurance for homes, cars and businesses.

“Everything,” said Sunnyvale insurance agent Steve Nelson, “has gone up.”

The pandemic and high costs of living, especially in the Bay Area, have aggravated a shortage of construction workers, and combined with inflation-boosting prices for building materials, insurers are on the hook for rising replacement costs when homes and commercial buildings are destroyed or damaged. So homeowner premiums have gone up 20% to 25% in the past three years, Nelson said, adding that commercial policies vary so much it’s not possible to specify the increase accurately. Auto insurance pricing also depends on several factors, including ZIP code, but Nelson estimates it has risen about 15% in the past few years, despite drivers getting a break during the worst of the pandemic.

Huge home insurance payouts by insurers after wildfires sent some providers fleeing from the risky areas of California, leaving fewer companies in the Bay Area and the state, with more risk in their portfolios, leading them to charge higher prices, said Nelson, who co-owns Nelson/Nelson Insurance Services with his cousin Jason Nelson.

The two Nelsons represent the third generation to run the business, after Nelson’s grandfather Buford founded it just after the Second World War. This news organization spoke with him about the state of insurance coverage at a time when prices are up considerably for virtually every consumer good. His comments have been edited for length and clarity.

Q How did the COVID-19 pandemic affect the insurance industry in general, including for home, auto and business?

A The insurance industry as a whole automated quite a bit more. The automation has given people (in the insurance business) the ability to work from home, but I think the efficiency level has dropped a little bit. In some ways it speeded up the process; in other ways it slowed down our ability to be able to quote new policies and be efficient — it’s kind of a Catch-22. Insurance is kind of slow on the digital side of things, applications, things of that nature. We do a lot of it on the computer but there’s a lot of parts and pieces where we were still taking information in and filling it out … on a PDF form by hand. A lot of that’s changed. They’ve automated it, where they’re pulling that information from other sources.

Q How did the COVID-19 pandemic affect car insurance when so many people shifted to working from home?

A A lot of companies stepped up and automatically decreased people’s mileage driven per year — everything’s based on miles driven for your rates. Some companies gave discounts, other companies … just automatically based everybody at 3,500 miles a year.

Q What’s happened with those discounts now that many people have resumed earlier driving patterns?

A That has been taken off now that things are back open. Everybody’s being charged based on their normal driving habits. Some people who work remotely, we keep them low — they just have to provide some proof, like mileage readings.

Q What’s affecting homeowners insurance?

A What really has been hitting people in California are the long-term effects of several years of large fires — there’s definitely a trickle-down effect in insurance. Even if you’re not in an area that has high fire risk, in insurance we all share risk. Those fires have driven companies out of areas that they used to cover in. A lot of companies have just decided, “We’re no longer going to insure in these areas.” Because there are less insurance companies, (remaining ones) are taking on more risk, and that has driven costs up. Where we used to not have much of an issue writing insurance in places like Saratoga or Los Altos, or the hills of Redwood City and certain areas of Fremont and Milpitas, now there are times, even in Morgan Hill, where we’ll submit something that any company would have taken, and they say no.

Q How is inflation affecting the insurance market?

A The property side is the most affected by rises in costs. Any time that we write a homeowners policy or rental policy or any type of situation where the customer is covering the property, we have to value the cost to rebuild it. Labor prices have really skyrocketed in California, and material prices. Gas prices fit in because the transporting of those materials is expensive. And we have the cost of not having enough material, because of supply chain problems. A couple of years ago, if I were to run a replacement-cost estimate on a three-bedroom, two-bathroom home, the cost would be about $300 to $350 a square foot. Now you’re looking at that three-bedroom, two-bathroom house costing $400 to $450 per square foot.

Q What happened with business insurance costs during the pandemic?

A A lot of their cost is tied to what their revenue is: If you’re a restaurant and you’re serving $100,000 worth of food a month compared to $700,000, your risk is lower. If your risk drops, then we go to the company and we take care of it. Any company or any business type that had a reduction in revenue and their policy was based on that had the ability to go in and do that. We did have a few small businesses, like hair salons — some of them that couldn’t open called us and canceled their policy. A lot of those people … came back when they were able to open.

Q What advice do you have for consumers about insurance?

A Pay attention to your insurance policies. Look at what it cost before, what it costs now. Make sure the coverage amounts are correct. Call your agent and shop around. There’s no harm in sending it out to several other companies and seeing what someone else has to offer and get a little bit educated on how it works. Get three or four quotes. Try a few different agents — maybe get someone like us that’s independent and can shop different places. Most people have no idea how insurance works for a homeowner, or even on a car. What’s good for one person is not necessarily good for another. It’s not just about saving money because in the long term it could cost you quite a bit. The (California) Department of Insurance does have a lot of information for consumers online.

ebaron@bayareanewsgroup.com