LOS ANGELES (AP) – Two insurance industry giants have pulled out of California's home insurance market, saying increasing wildfire threats and rising construction costs have prompted them to stop buying new policies in the country's most populous state.
State Farm announced last week that it would stop accepting claims for all business and personal lines of property-casualty insurance, citing inflation, a difficult reinsurance market and “rapidly growing catastrophe risk.” The decision had no impact on private motor insurance.
“We take our risk management responsibilities seriously,” State Farm said. “These actions must be taken now to improve the company's financial strength.”
Allstate, another insurance company, announced in November that it would suspend new homeowner, condo and commercial insurance policies in California to protect existing customers.
“The cost of insuring new home customers in California is far greater than the price they would pay for policies due to wildfires, higher home repair costs and higher reinsurance premiums,” Allstate said in a statement.
California's choppy market aligns with trends across the country, with companies raising rates, reducing coverage or retreating altogether from regions prone to wildfires and other natural disasters in the age of climate change. Florida and Louisiana are struggling to maintain healthy insurance markets after significant damage from hurricanes. In Colorado, premia are rising in the face of wildfire risk, and an attempt to map wildfire risk in Oregon was rejected last year over fears it would send premia skyrocketing.
Scientists say climate change has made the west warmer and drier over the past three decades and weather will continue to become more extreme and wildfires more frequent and destructive. In recent years, California has experienced the largest and most devastating fires in the state's history.
Some California homeowners are already uninsured, and the lack of new policies could make buying a home more difficult. A state pool that serves as an insurer of last resort for many could come under pressure as enrollment surges.
The state pool — the California Fair Access to Insurance Requirements Plan — provides basic fire insurance coverage for properties in high-risk areas, while traditional insurance companies don't. Enrollments have skyrocketed in recent years to 272,846 homes in 2022.
“We just don't have a stable insurance market,” said State Senator Bill Dodd, a Democrat from Napa, whose northern California county was devastated by wildfires. “What's happening is a lot of people in my county and frankly other counties are … naked — they don't have insurance.”
According to the industry-backed Insurance Information Institute, more than 1.2 million homes in California are at risk of extreme wildfires, far more than any other state.
“The number of acres burned in California has steadily increased over the past several years as more people move to fire-prone areas of the state,” the institute said in a statement on the California corporate withdrawals. “More Homes at Risk – Combined with rising costs to repair or replace homes damaged or destroyed by fire, this is leading to an increase in insured losses.”
In Colorado, which has been ravaged by devastating wildfires, insurance premiums have risen significantly and some smaller insurance companies have pulled out of real estate coverage. A study commissioned by state lawmakers found that 76% of insurers reduced their exposure to Colorado in 2022, leaving the top five insurers dominating the market.
Florida has been struggling to keep the insurance market healthy since 1992, when Hurricane Andrew leveled Homestead, wiping out some insurance carriers and leaving many remaining businesses afraid to issue or renew policies in Florida. Risks for airlines have also increased as climate change increases hurricane strength and rainstorm intensity.
Louisiana is in the midst of an insurance crisis, exacerbated by Hurricanes Delta, Laura, Zeta and Ida in 2020 and 2021. As claims mounted, companies that had homeowners' policies in the state defaulted or left the state and canceled existing policies or refused to renew existing policies.
In California, the loss of major insurers could add pressure to relax consumer-centric policies that have kept rates low in the state for years. Voters passed Proposition 103 in 1988, which allows the state Insurance Commissioner to reject proposed rate increases and order refunds. It's credited with saving consumers billions of dollars, but the industry says it imposes limitations on exact underwriting and pricing.
Last year, Insurance Commissioner Ricardo Lara issued regulations requiring insurers to give customers discounts if they meet new standards like building fireproof roofs and creating defensible spaces around their homes.
Prior to their announcements, both State Farm and Allstate had sought significant rate increases.
Consumer Watchdog, a nonpartisan advocacy group, said State Farm's decision was unlawful.
“Insurance companies cannot just stop selling insurance to consumers to make more money for themselves,” Harvey Rosenfield, the author of Proposition 103 and founder of the group, said in a statement. “They need to open their books and get approval from the (state) commissioner of insurance.”
Lara's office did not respond to an email request for comment.
A government website lists more than 100 companies that sell home insurance. However, some only offer limited amounts of coverage, such as earthquake or renters insurance.
Associated Press writer Coleen Slevin in Denver contributed.