Scramble for homeowner insurance

CALIFORNIA

Farmers Insurance saw a spike in applications for homeowners insurance in California when State Farm and Allstate stopped writing new policies in the state, but the insurer told The Sacramento Bee on Friday that it won't be accepting any more new business than it had previously planned for 2023.

"We are working diligently with the California Department of Insurance and others interested in improving the availability of property insurance in the state," Farmers leaders said in a statement shared by spokesman Luis Sahagun. "With record-breaking inflation, severe weather events and reconstruction costs continuing to climb, we are focused on serving our customers while effectively managing our business."

While State Farm and Allstate have said they will not write new homeowners policies in California, Michael Soller, a spokesman for Insurance Commissioner Ricardo Lara, stressed that Farmers — the state's second-largest insurer — and more than 100 other companies continue to accept new homeowners business.

"The Department of Insurance understands Farmers has been writing 7,000 monthly new homeowners policies on average," Soller said, "We do not expect their footprint in the state to change significantly one way or another. By maintaining its historic average of new homeowners policies in California, Farmers is showing its continued commitment to the Golden State for the long haul."

The announcement from Farmers does, however, show that there is a great deal of consumer demand for policies and that the capacity to handle all that new business will be tested.

All insurers have to maintain a certain amount of capital to back the policies they write, said Rex Frazier, president of the Personal Insurance Federation of California, and if they don't have that capital, they can't accept new business. That's why State Farm and Allstate stopped writing new policies, he said.

Testing capacity in California's home insurance market

In the area of homeowners insurance, 12 carriers write 84% of policies in California, Frazier said. State Farm, the state's largest home insurer, held 21.2% of policies to Farmers' 14.9%. But, he said, then there's a pretty big drop in market share before you get to the next carrier, CSAA with 6.87% of the pie.

"If Farmers writing almost 15% is saying they can't take a single new policy beyond what they were doing, do we really think CSAA or Liberty Mutual or Mercury or these other companies that are at around 6% market share, are they going to have the capacity to do it?" Frazier asked.

He said he feels like much of that business will go to the California FAIR Plan, the insurer of last resort for people who can't get coverage from a commercial insurer. Created by California law, the FAIR Plan is operated by an association of state-licensed commercial carriers such as State Farm, Farmers and Allstate.

If, for some reason, the FAIR Plan runs out of money to pay its claims, it has the power to assess the commercial carriers a fee to cover what is needed. The portion they must pay is determined by market share.

Consequently, when thinking about capital needs, Frazier said, insurers must think about not only their liability but also the liability they face through the FAIR Plan. Carriers are desperately trying to right-size, Frazier said, because inflationary pressures and catastrophic weather and fire events, driven by climate change, have driven up their costs.

Frazier said there's increased risk in a state like California where many developers are going to leaders in rural counties eager to have more property tax revenue because it's cheaper and quicker to build there than it is construct an infill project in urban spaces.

But there's increased risk with the more rural properties, Frazier said, because as you build further out, you have more exposure to the wildland-urban interface where there's a greater potential for wildfires.

"We're convinced that there is a perceptible change in weather patterns, where we have more peak fire days than we used to have," he said. "We're not concerned about a fire in July when there's still moisture in the grass. We're concerned about the fire in late October, early November when we have the traditional winds. Like up in Northern California, we have the Diablo winds."

Why climate change plays role in insurance coverage

These hot, seasonal winds come along, as they did with the devastating Camp Fire in November 2018 in Butte County, and it hasn't rained in a really long time, perhaps six months or more, Frazier said. That combination of hot winds and low moisture used to last about a month in Northern California, and then it would start to rain maybe in November. Now, that rain may not come until December or even January, he said, giving wildfires perfect conditions to rage out of control.

"Ten years ago, who even knew the term atmospheric river?" Frazier asked.

Those deluges of water dump about the same amount of yearly precipitation but in shorter bursts.

"Even a diligent homeowner who would have hardened their home doesn't have defensible space around their home," Frazier said. "It's just a lot to ask the firefighters to think that they can stop these 50or 60-mph wind-driven fires."

The cost of rebuilding homes and businesses has skyrocketed because of inflation, Frazier said, and the reinsurance companies that many commercial carriers contract with to share the financial risk are charging higher prices and negotiating tougher terms. And, because California has placed controls on premium increases, he said, insurers cannot simply raise rates to quickly recoup these additional costs.

Economist Benjamin Keys discussed the risks and pressures on home insurers nationwide in Penn Today, a publication of the Wharton School of Business at the University of Pennsylvania. He said insurers want to make a profit, so they're trying to limit exposure under the current regulatory environment and under current limits on premium increases.

This means that California consumers will likely be seeking coverage from a company that doesn't have the household name recognition of Farmers or Allstate. In the statement sent to The Bee, the Department of Insurance said its consumer service experts can help people navigate their options and they have set up a hotline, at 800-927-4357, where residents can get help in multiple languages. The department also has a home insurance finder at insurance. ca.gov.