Property insurance apocalypse: Some progress, no immediate relief

During Orinda homeowner Yasaman Nazmi Lee’s home-insurance saga — one of millions playing out across California as the age of mega-fires drives insurers to pull back from coverage and raise prices — there was bad news, then good news. But even the good news was not great.

Nazmi Lee’s insurer, Travelers, threatened to drop her $8,700-a-year coverage policy last year. Then it agreed to renew — for a staggering $13,000. Since other insurers were quoting up to $30,000, Lee re-upped with Travelers. She trimmed the pricey premium to $11,000 by boosting her deductible to $25,000.

In a state where housing affordability is a top concern, this year was supposed to offer homeowners rocked by policy non-renewals and steeply rising insurance costs a ray of hope, if not some relief. Spurred by Gov. Gavin Newsom, elected Insurance Commissioner Ricardo Lara spent last year pushing changes to state regulations to appease insurers who argue the rates they’re allowed to charge haven’t kept up with wildfire risks and costs.

“There is a point at which I think people are going to rethink living in the state,” Nazmi Lee said. “My greatest disappointment here is with Governor Newsom and our local elected officials for not doing enough.”

Nine of the 10 largest conflagrations in California’s history have occurred since 2017, as climate change boosts the frequency and severity of wildfires around the world. Insurers have responded by fleeing risky areas and raising rates.

Newsom’s office noted that he signed a 2023 executive order directing the state insurance commissioner to “take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance.”

The state’s Department of Insurance launched the “Sustainable Insurance Strategy.” Insurers would get to use catastrophe forecasting to set insurance rates, and could recoup their own insurance costs from customers — in return for expanding coverage in areas of high fire risk.

Before, companies could simply cancel policies, decline to renew them, or stop covering areas altogether, Insurance Department spokesman Gabriel Sanchez noted.

Last month, the insurance department released the formula companies can use to recover their “reinsurance” costs, and last week the department issued the first approved catastrophe-prediction model. Insurers can start using the formula and model in rate-increase applications.

“This is progress,” said Patrick Sullivan, who writes The Property Insurance Report newsletter. However, Sullivan added, California’s lengthy rate-hike approval process — averaging 281 days, according to the Insurance Department — means insurers likely won’t start offering new policies in fire-risk areas until next year.

Once companies receive approvals under the strategy, Sanchez said, “they’ll be required to start increasing coverage in wildfire-risk areas by 5% every two years until they’re providing at least 85% as much coverage in high-risk areas as they do in non-risk areas.” Insurers also can count policies they sell outside designated risk areas that replace the state’s pricey last-resort FAIR Plan policies.

Department of Insurance spokesman Michael Soller said he expected companies to start expanding coverage under the insurance strategy by the end of this year.

Mark Sektnan, vice-president of government relations for insurance-industry group American Property Casualty Insurance Association, said California’s insurance crisis stems from decades of regulatory problems and delays, along with rates too low to cover claims payouts. For the last 10 years, insurers in California have been paying out $1.15 in claims for every dollar received from premiums, Sektnan said.

“Rebuilding a stable, competitive market will take time — there is no quick fix,” Sektnan said.

A bill in the California legislature would create a public catastrophe-prediction model, which Lara said would help with emergency planning and wildfire-safety efforts, “and support effective regulation of insurance rates.”

Millions of Californians in fire-risk areas have lost home insurance through non-renewals, including, according to a Bay Area News Group analysis, more than 1 million in the Bay Area. Since 2022, seven of the top 12 insurers in the state have paused or limited writing new policies, according to the state’s Department of Insurance.

Sixty percent of Bay Area residents worry home insurance will get pricier because of climate change, and 58% fear they won’t be able to insure their homes at all, according to survey results released this week by the non-profit Public Policy Institute of California.

The cost of the average homeowners insurance premium in California is expected to rise 21% this year to nearly $3,000, according to Insurify, a comparison-shopping company for insurance. California’s regulation of rates means costs fall below the national average — $3,520 for this year, Insurify projects — but that provides little comfort for residents whose premium prices have been skyrocketing.

“In two years, it’s gone up more than 60%,” said Dave Lewis, 70, a retired engineer who lives in San Jose with his wife and adult daughter, in a home abutting grassy, oak-covered hills that now costs $2,500 a year to insure. “It’s sort of a runaway cost.”

Sullivan traces the abrupt expansion of fire risk back to the catastrophic fires in the Wine Country in 2017 and Paradise in 2018.

“The system is struggling to adapt to a new peril: Wildfire has appeared and completely upended everything,” Sullivan said.

California went from a “deeply profitable” market for companies selling property insurance to a bottom-line nightmare of massive wildfire-damage claims — at least $56 billion in insured losses from this year’s Los Angeles fires, according to brokerage Gallagher Re — and “now the 10-year profit margin is abysmal, among the worst in the country,” Sullivan said.

Many Californians have been pushed onto the FAIR Plan, a state-mandated, privately run high-risk pool for the otherwise uninsurable, where the number of policies has exploded to around 600,000 from about 234,000 in 2021. Although San Jose electronics company manager Mark McCoy has not experienced a significant rate hike on his home, the insurer for the Gold Country cabin he shares with three siblings refused four years ago to renew their policy, he said.

“We were all scrambling, and looking at different carriers,” said McCoy, 65, adding that they landed on the FAIR plan — but this year saw their cost jump 42% over last year to more than $2,300.

The insurance strategy is intended to get residents off the FAIR Plan and onto regular insurance, Soller said.

Advocacy nonprofit Consumer Watchdog doubts the insurance industry will hit the 85% mark for policies in fire-risk zones. The group alleges that the final regulation provides a loophole allowing insurers to increase policies to only 5% instead of 85%, which the insurance department insists isn’t true.

The policy letting insurers recoup their “reinsurance” costs from customers is not the only new rule from the Insurance Department that will directly raise insurance rates, Rosenfield said. After the Los Angeles fires put the FAIR plan on the hook for billions of dollars in loss claims, the department announced it would let insurers, which share profits, losses and expenses from the plan, recover from consumers half of the first $1 billion in claims from those blazes, and all costs from claims above $1 billion.

In San Jose, Lewis expressed resignation over the disasters that afflict the state’s residents.

“That’s California for you,” Lewis said. “Earthquakes and wildfires.”

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