California’s Home Insurance Crisis: The Latest Challenges (And New Solutions) For Carriers, Homeowners, and Lenders

The home insurance market has been a hot topic in 2023, with an unprecedented increase in premiums and a lack of available options for homeowners. While these trends are prominent across the US, some states are facing bigger issues than others. In particular, California is facing a record level of carrier exits and restrictions, leaving many homeowners without affordable coverage. Read on to learn what you need to know about the current California insurance market and how it’s affecting consumers and mortgage lenders.

Carriers face challenges in the California insurance market

It’s no surprise that climate change is causing a big increase in natural disasters. In California, that means an unparalleled number of wildfires, floods, and droughts. One study showed a 25% increase in wildfire risk in recent years due to climate change. These events, coupled with population increases in high-risk wildfire areas, inflation, and the high cost of building materials, have led to record losses for insurance carriers in California.

Slow (or no) approvals from the DOI

To cover the increase in losses, carriers need to raise premiums — but that’s easier said than done. Insurers need to get approval to increase rates from California’s Department of Insurance (DOI), which has been very slow to respond. The DOI has often denied increases after a long waiting period or ignored requests completely. Some companies have reported waiting up to six years for approvals or getting approval for only a fraction of the requested increase. A requested increase of more than 7% is also subject to more rigorous reviews, which adds time to the approval process and discourages carriers from asking for higher rate hikes. 

Restrictions on how insurers set rates

In addition to long approval cycles from the DOI, carriers face other obstacles when it comes to setting premiums. Tight regulations in California don’t allow insurers to factor in the rising cost of reinsurance (which is insurance, for insurance companies) to their rate increases. They’re also prohibited from considering future costs due to climate change and can only rely on historical data when setting rates. Insurance companies report that incorporating future costs is necessary as a rise in catastrophic events and inflation continue to influence their losses — historical data is no longer an accurate predictor of future events.

These factors have contributed to the unprecedented carrier exits we’re seeing today in California, since many are unable to recoup losses and continue writing new business at a profit. In the last eighteen months, at least seven of the top twelve property insurance carriers in the state have either stopped writing new business entirely, restricted the areas where they issue new policies or chose not to renew existing customers. Carriers that have left California or placed limitations on new business include major names like State Farm, Allstate, Farmers and AIG, along with AmGUARD, Falls Lake, Chubb and Kemper. 

 

How California homeowners have been affected

The unstable market has caused a severe lack of homeowners insurance options for consumers in California, especially in high-risk wildfire regions where carriers continue to exit at alarming rates. California online quote declinations increased by a staggering 34% over the last sixteen months.* In June 2022, online quote declinations were sitting at 14.6% and skyrocketed to an all-time high of 52.3% by April 2023. Even more unsettling is how California declinations compare to the national average. In April 2023, the average declination rate across all US states was 26.2% — a whopping 26% lower than the California rate.

Another source indicates that insurance options have been limited by as much as 20%. An increasing number of homeowners who are unable to secure coverage with a private carrier have been forced onto the FAIR Plan, known as California’s “insurer of last resort, “ which is expensive and offers limited coverage. 

For those who have managed to find alternative private options, their experience has been less than ideal. With so many carrier exits, pressure on remaining insurance companies is at an all-time high. An example of this is State Farm’s exit from California, which led to a regional carrier in the state experiencing a 500% surge in inbound calls and extensive customer service wait times. For mortgage lenders, that means a delay in securing proof of insurance and potential impacts to the loan closing process.

Even with regulatory challenges, Matic’s premium data shows that California experienced the third highest rate increase in the US, with new business rates rising nearly 14% year-over-year. Premiums in California are 16% lower than national averages, however — a result of the aforementioned restrictions.

Government addresses problems with new Sustainable Insurance Strategy

Lawmakers in California are realizing how serious their homeowners insurance crisis really is. After no progress was made in the State Legislature, Insurance Commissioner Ricardo Lara announced a group of actions called California’s Sustainable Insurance Strategy to combat the most pressing issues. The program aims to reform the California insurance market to ensure all residents have access to the insurance they need at a fair price.

One major component of the plan encourages insurance companies to return to California and cover high-risk wildfire areas by reducing some of the restrictions they’ve previously faced with setting their rates. For example, carriers would be allowed to consider the future cost of climate change in their rates. The program also seeks to make the rate approval process easier and improve aspects of the FAIR Plan to ensure it can sustain current and future market volatility. While these actions could cause the price of insurance to increase, the incentive for carriers to come back to California could ultimately lead to more competition and a better situation for consumers.

The plan also involves more support and funding for wildfire safety in the state in hopes of reducing the rise in catastrophic fires. Insurance companies would also be required to recognize and consider the importance of actions that homeowners take to reduce wildfire risk when setting rates, like installing updated windows and roofing. It’s unclear when these proposed actions would go into effect, but it will likely take several months or longer.

How the California insurance landscape affects mortgage lenders

Low product availability and high pricing in California is affecting borrowers and mortgage lenders alike. As a whole, 79% of lenders in the US have experienced an uptick in challenges with homeowners insurance in the last year, citing problems such as issues with DTI, delayed loan closings, and a stressful borrower experience. Not only are these issues frustrating for lenders, but they lead to reduced efficiencies, increased costs, and even lost loans. Lenders who issue loans in California should be aware of happenings in the insurance market, both to help their borrowers understand their options and to be prepared for impacts to the loan closing process. 

*Declination data is gathered from over 2 million quote requests to Matic from June 2022 – October 2023.

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