State Farm and Allstate have taken steps to pull out of the California insurance market. One big reason why is the risk of wildfires in California.
On May 26, 2023, State Farm announced that they were no longer accepting any new applications for business and personal lines property and casualty insurance in California. The company said they made the decision because of higher construction costs, increasing exposure to catastrophes such as wildfires, and a difficult reinsurance market.
In addition, according to a statement emailed to media outlets, Allstate has stopped accepting applications for new commercial, condominium or home insurance policies in the state. They stopped accepting these applications last year, according to the statement. The company, in the statement, claimed that it would cost them far more to insure new home insurance applicants than the applicants would pay for home insurance policies because of wildfires, construction costs and high reinsurance premiums.
Company officials with both companies said homeowners in the state who already have policies will not be affected and will be able to renew their policies.
Will Insurance Prices Go Up?
A KTLA report suggests that, as a result of State Farm and Allstate pulling out of the California market, home insurance prices may go up.
An economist told KTLA that owning a home may become more expensive since home insurance is a part of homeowners’ monthly budgets. The economist said that insurers will be able to charge higher prices with fewer insurers in the state as competition.
Homeowners are not required by California to have insurance. However, many mortgage lenders require home insurance.
An economist told KTLA that this could lead to the only people being able to afford homes in high-risk areas being those who can pay for homes in cash or those who can obtain outside financing like loans from family members.
What Alternatives Do California Homeowners Have?
Depending on their location, some California homeowners may be able to find new policies with smaller home insurers. However, State Farm and Allstate were the only insurers offering new home insurance policies in high-risk mountain areas before they took steps to pull out of the California market.
For those living in high-risk areas who cannot find a private insurer to provide them with home insurance, there’s California’s FAIR Plan.
The FAIR Plan was created to meet the needs of homeowners in California who cannot find home insurance in the private insurance marketplace. The plan is not a public entity or state agency. It is not funded by taxpayers or the public.
The plan is a syndicated insurance pool composed of every insurer who is licensed to do casualty/property business in the state. The plan was established by California Insurance Code sections 10091 et seq. in 1968.
Every licensed casualty/property insurer who writes basic property insurance which is required by the insurance code is a member of the plan. The plan issues insurance policies on behalf of member companies. Every member company participates in the expenses, losses and profits of the plan in proportion to its share of business in California.
The FAIR Plan is considered a temporary safety net. It exists to support homeowners until traditional coverage becomes available.
The plan is considered California’s insurer of last resort.
Why Did State Farm And Allstate Pull Out Of California?
State Farm and Allstate both cited the same three reasons for no longer offering new policies in California: wildfires, construction costs and reinsurance costs.
Wildfires
California has suffered a lot of wildfires in recent years. California suffered $14 billion worth of insured wildfire losses in the year of 2017, which is a record. That year, 9,560 wildfires burned 1,548,429 acres of land in the state, destroying 10,280 buildings and killing 47 people. The Thomas Fire was the largest fire in the state that year, burning 281,893 acres of land, destroying 1,063 buildings and killing two people. That fire also removed vegetation from hillsides, which led to debris flows in 2018 which killed 23 people, destroyed 73 buildings and damaged 482 buildings.
Many have blamed climate change for the recent surge of severe wildfires in the state, including a recent UCLA study which calls climate change “the driver behind much” of the changes in California’s wildfire patterns.
Others have blamed land management policies in the state for the frequency and severity of recent wildfires. For example, a UC Berkeley professor said that the primary reasons that the Dixie Fire grew so quickly and grew so large were overgrowth of vegetation and a lack of prescribed burns.
These concerns were echoed by a 2020 ProPublica report, which concluded that wildfires are growing out of control in California due to overzealous fire suppression which causes wildfire fuels to build up.
Construction Costs
A 2022 Los Angeles Times report found that affordable housing in California now routinely costs more than $1 million per apartment to build. The report found that a key reason for this is increases in the prices of labor and materials. The report states that labor and material prices have soared due to worker shortages which occurred during the COVID-19 pandemic, supply-chain problems and inflation.
Reinsurance Costs
State Farm and Allstate both cited the costs of reinsurance as a reason they aren’t accepting new home insurance applications in California. Insurers buy reinsurance to guarantee that they are able to pay out their own insurance policies. Janet Ruiz, an Insurance Information Institute spokesperson, told the Orange County Register that the system in California prohibits insurers from passing the costs of reinsurance onto customers. In other words, when the costs of reinsurance go up, California doesn’t allow insurers to raise their rates to compensate for this, so if the costs of reinsurance go up too much, it can cost insurers more to insure customers than they receive from the customers.
However, Consumer Watchdog founder Harvey Rosenfield said that California’s Proposition 103, which was passed in 1988 and makes insurance companies need prior approval from the state’s Department of Insurance before implementing casualty and property insurance rates, lets insurance companies charge reasonable rates and make reasonable profits. Rosenfield said the insurance industry is attempting to force Ricardo Lara, the state’s Insurance Commissioner, to allow high rate increases which aren’t justified, calling the insurance companies’ moves to pull out of the state “extortion.”
Similar Insurance Company Pull-Outs Have Happened Before
This isn’t the first time a major insurance company has limited or refused to accept new homeowners insurance applications.
In 1994, Allstate limited the sale of new insurance policies in California to existing customers in order to reduce its risk of losing money due to earthquakes. The move came after the company lost around $950 million in the 1994 Northridge earthquake, a magnitude 6.7 earthquake which caused $13 to 50 billion worth of damage, killed 57 people and injured over 8,700 people.
Allstate again paused all new homeowner policies in the state in 2007 after proposing a 12.2 percent increase in homeowner premiums in order to cover threats from earthquakes and fires in the state. That pause lasted from 2007 until 2016, when Allstate began accepting new homeowner policies in California again.
Jeffrey Nadrich
Jeffrey Nadrich is a nationally-recognized California plaintiff’s personal injury attorney. He is a graduate of UC Berkeley and UC Hastings College of the Law. He has successfully represented thousands of injury clients over the last 40 years.
