Two insurers leave California due to wildfires and regulations.
Two New Home Insurers Exit California Market, Leaving Residents with Limited Options
Residents in California are facing a challenging situation as two home insurers have recently announced their plans to withdraw from the state’s insurance market. This decision further reduces the options available for homeowners to protect their properties amidst the increasing risks of wildfires and extreme weather events.
AmGUARD Insurance, a subsidiary of Berkshire Hathaway-owned GUARD Insurance Companies, has made the decision to withdraw its homeowners insurance policy and personal umbrella policy program in California. Additionally, Falls Lake Insurance has also announced its plans to end its homeowners insurance program in the state.
The insurers’ plans, made public late last month, make them the latest in a growing list of California home insurers who have either scaled back or pulled out operations altogether in the state amid growing exposure to wildfires and a challenging reinsurance market.
Earlier this summer, State Farm, the largest home insurance provider in California, made headlines when it revealed its decision to stop insuring new homes in the state. The reasons cited for this decision included historic increases in construction costs, rapidly growing catastrophe risks, and challenges in the reinsurance market.
Allstate, another major player in California, quietly stopped issuing new property insurance policies in the state in June. Other insurers, such as AIG and Chubb, have also declined to renew policies for thousands of homeowners in California, citing climate catastrophe risks and an inflexible pricing structure that prevents them from adjusting premiums accordingly.
As a result, the number of homeowners in California who have lost coverage has significantly increased in recent years. According to the most recent data from the California Department of Insurance, nonrenewal of home insurance policies spiked by a staggering 30% in 2021 compared to the previous year.
Climate Change, Poor Management, and Regulation
California officials attribute the rise in climate change-fueled disasters as the primary problem. However, insurers argue that poor management and regulation, particularly California’s 1988 insurance law, are major factors driving their exit from the state.
California is the only state that requires insurers to consider 20 years of historical data when setting premiums. This has resulted in a highly competitive and costly insurance market for homeowners.
Property insurers in California are unable to accurately price risks associated with wildfires and other climate catastrophes that have devastated the state in recent years. Factors such as hotter temperatures, drought, and poorly managed forests have made it challenging for insurers to operate effectively. Consequently, they are leaving the state at an unprecedented rate compared to other parts of the United States.
While natural catastrophes have increased in many states, none have experienced a decline in property insurance like California. Jerry Theodorou, the director of the finance, insurance, and trade program at the R Street Institute, highlighted this disparity in an interview with the Washington Examiner.
Losses incurred during the 2017 and 2018 wildfire seasons alone were so significant that they wiped out more than 20 years of underwriting profits. Insurance companies also face limitations due to state laws that prevent them from passing on the increased costs of reinsurance premiums to consumers.
“They need the flexibility to adjust their pricing and coverage so that it’s something that doesn’t bankrupt them,” Theodorou emphasized.
Unfortunately, these challenges are expected to worsen as California continues to face widespread and intense wildfires, affecting more properties than ever before. Additionally, reinsurance rates are continuing to rise, adding to the difficulties faced by homeowners.
Click here to read more from the Washington Examiner.
During an insurance department workshop this summer, Allstate’s chief risk officer, Parr Schoolman, urged California policymakers to update the state’s insurance pricing model to more accurately account for wildfire risks. Without these enhancements, Allstate may remain closed to new business or consider further nonrenewals or a complete withdrawal from the California market.
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