The first house I ever bought was located in an area that was not in a flood zone and my mortgage did not require me to have any flood insurance. I bought it anyway, particularly since there were spots within the area that were in flood zones. When Hurricane Katrina came, my house flooded with water going up into the attic. Because I had flood insurance, when not required, I was able to rebuild my life much more easily and quickly than those who didn’t.
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Perhaps true, and reinsurance rates are skyrocketing. Yet, the elected California Insurance Commissioner refuses to allow insurance companies to calculate reinsurance rates into their state premiums.
Which is why the insurance companies will take their ball and go home.
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Many people seem to underestimate just how large a state California is. Whenever there is a big news story about a wildfire in California, some relatives on the east coast will ask me if I am doing okay. Without exception, the wildfire is in a completely different area of the state, often 500+ miles away. CA wildfires generally occur in wooded areas that are far away from population centers. There has never been a wildfire or similar climate event that caused 20% of persons in CA to file a claim, and I doubt there ever will be.
My particular insurer has been in operation for 80+ years and has been exposed to many wildfires and large climate events during that period. They have excellent financial status ratings, and I expect have re-insurance to protect against group events that simultaneously impact a significant portion of customers (less than 20%).
The primary reason why many insurers are backing out of CA is not fear of being wiped out by wildfires or similar group events like above. I expect it has more to do with CA prop 103 restricting insurers from increasing rates to keep up with increasing costs, making CA less profitable than other states or unprofitable.
Under CA prop 103 insurers must get government approval to have a large rate hike, and the government often does not approve such requests. The requests for rate hikes also can be a long and expensive process for insurers. For example, an insurer cannot simply say they need to charge customers more because there are more wildfires than in the past. Instead the government requires insurers to use statistical models from the past 20 years of wildfires to determine wildfire risk. A higher rate of wildfires in the past few years has little impact on the 20 year average, so they can’t increase rates much. Perhaps a more significant contribution than wildfires is that rapidly increasing cost of CA housing/labor/rebuilding/materials… since COVID is expediting the need for rate hikes, which are challenging to approve. It can be more profitable for insurers to simply focus on other markets.
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I think this is totally true. People in other parts of the country have no context for the fact that California is 800 miles long by 400 miles wide with 40 million people. Los Angeles County has 15 million people, larger than many states or countries.
I was using the 20% as an extreme number. I work for an insurance company (health) on the east coast and quite familiar with the regulatory environment at least at is applies to us. I was unaware of Prop103 which, yeah - is going to drive insurers to take their business elsewhere.
But to go on the illustration started above - $20K annually to insure a $1.7M home. Lets say the home itself is a $1M of that (not familiar with the area and if that would be directionally accurate or not). And the $20K premium probably includes 10-15% for admin and profit. So lets say $18K for “loss reserves”. So not 20% above, but the breakeven assuming the same ratio across the book of business is a 2%/year. So if 2.1% of their book of business gets wiped out from an event, they’re underwater.
The more regulators try and control that premium it cuts into their admin/profit (which an insurer might be willing to do) but as soon as they’re taking losses in excess of the reserves they’re going to stop selling policies.
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I think part of the problem is having so many disasters now that total the many houses. Insurance is all about spreading risk, so sometimes impacted rate area get broader.
A distinction without a difference. Their actuarial forecasts include all losses, including the rare wild fire, and the cost to replace/repair. btw: reinsurance rates are influenced by wild fires, but the insurance pol will not allow that factor.
Small correction: ALL rates must be approved, regardless if large or small increase is requested.
The state is going to have to address this. In theory legislating to keep our rates low sounds great, but not if insurance companies just leave the state or refuse to insure certain areas. A record low number of homes have been on the market, but there will be blowback when people start realizing they cant sell their houses anymore because they are uninsurable.
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Regardless of actuarial forecasts including all losses, a key limitation is prop 103 restricting increasing rates to a high enough level to keep up with increasing costs. I expect insurers backing out of the state has more to do with CA market being less profitable than alternative markets, than fear of being wiped out by climate events. This lack of profitability can include things like housing replacement costs increasing by faster than approved insurance rate increases, with the post-COVID housing market changes, rather than differences in chance of filing claim.
I was referencing different approval rules for rate increases of <7% and >=7%. Public advocates are allowed to challenge rate increases of >= 7%, which can lead to delays of more than a year and the insurer covering the public advocates’ legal fees. With this 7% distinction, some insurers repeatedly request increases by 6.9% or end up getting a 6.9% rate increase when initially requesting larger. An example table showing recent auto insurance rate approvals (at time of article) is below. Every approved rate in the table was exactly 6.9%. In contrast, CPI stats show cost of auto repair had increased by a much higher ~20% over previous year, reducing profitability for the insurer. With this reduced profitability, many auto insurers are backing out of CA, like home insurer, in spite of auto insurers have a much smaller degree of risk to group climate events.
Post-COVID housing has a similar type of limitation to auto. Post-COVID housing replacement costs have been increasing more rapidly than accommodated by a standard 6.9% rate increase.
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My mother’s house was built up against a national forest in Southern California, so at high risk for fire. Except that there have not been any fires in those canyons in 150 years. I believe it has to do with the way the winds blow there. But it was very difficult and very expensive to get homeowners insurance. She finally was able to get it through farming insurance because she had an acre of avocados on her land. I wonder if the folks who bought it and tore down both her house and the avocado grove have been able to find insurance for their new build.
We live in the PNW and looked into earthquake insurance when there was all the furors about the “big one” here. I was shocked at how cheap it was (around $250 per year) after having lived in CA. That was actually reassuring for me because if the insurance companies didn’t think they were going to have to make big pay outs, I probably shouldn’t lie awake at night worrying! We did get it, because it helped my husband also sleep at night. But I don’t know a lot of people who have it here.
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My friend found an insurance company. It’s going to be about 10k a year, which is so much money, but they’re thinking about staying in the deal. This new house purchase allows them to move her parents in with them as its a multi gen property with an ADU. It might not make financial sense if it was just them, but they’re splitting costs with her parents.
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$10K to insure a $1.7M home is a lot of $? I could be misinterpreting the origins of the thread comparing the cost to the property value. But if not, I would NOT consider $10K to insure a multi-million dollar property a lot unless you told me the land was $1.5M and it’s a meager $200K home on it.
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Well, the Cascadia Subduction Zone has not had a big earthquake since 1700, long before today’s insurance companies were aware of the region’s existence.
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When I lived in Portland and Mt. St. Helens would blow, there were small earthquakes but they never did any damage.
This thread is EXTREMELY useful and thought-provoking.
I just wrote to our State Farm agent, with whom we have multiple policies, to inquire about renter’s insurance for DC’s dorm room. In that same email, I noted that SF is not issuing new policies for homeowner’s insurance and whether it was thinking about canceling existing policies. I also mentioned that this will likely have a negative effect on the ability of existing homeowner’s insurance policyholders to sell their homes.
Yes, I know I will probably get the typical song and dance, saying nothing, but I would like to have a paper trail with SF in case things go further south.
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That’s the general pattern in coastal, southern CA. It may not be $200k home on $1.5M land, but the rebuilding cost is often a small fraction of the home value.
For example, the small, 1600sqft house at 1935 Santa Fe Ave, Del Mar, CA 92014 | MLS# NDP2308684 | Redfin is currently for sale at $6M. I expect the cost to rebuild is a small fraction of the $6M price tag.
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10k a year sounds like and insane amount of money, but not as bad as the 20k it would have been through the California fair plan. You’re accustomed to paying upwards of $1,000- $2,000 a month on homeowners insurance?
My homeowners insurance is $2400 a year on a 1.3 million dollar house.
None of the big insurance companies would insure this home at all, so they’re happy their broker found someone who would.
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I looked it up just for reference: The average annual cost of homeowners insurance in the United States is $2,417.10.
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yeah, that’s pretty pricey for CA. Our SoCal home is worth 7 figures, and HO is $1200 per year after discounts for also incl. auto. (no EQ)
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