the Turbulent Local Insurance Market

Got a Headache? So do We. Welcome to California’s Turbulent Local Insurance Marketplace.

A new client that I was speaking with just the other day, asked me what I meant in regards to the turbulent local insurance market in California. I was a bit surprised by the question. Doesn’t everyone know how hard it is to get home insurance in California? Do you read the papers? Speak with your friends? Perhaps my world view is warped by discussions with crying grandmothers, concerned real estate agents, and flabbergasted consumers. But the California Insurance marketplace is turbulent, [and that is a kind word for it.]

Allow me very clearly state this: The California Insurance Market is in a parlous state and depressing situation. I truly hope the market, especially for property insurance improves dramatically in the coming years. Elon Musk, Bill Gates, Noam Chomsky, Ruth Lawrence, Norman Schwarzkopf, anyone. Send in the your ideas!

To that end this simple blog post was created to attempt to list some of the Turbulence in the San Francisco Bay Area and California Insurance Market. This post is mostly in regards to personal lines insurance and not business lines. Business insurance also has its challenges, but its not at the same level.

Got a Headache? So do I.

Let us begin with homeowners non-renewals in the San Franciso Bay Area, that is when an insurer decides to NOT renew your home policy for another year. These non-renewals are up significantly. When consumers receive one of these legal notices, it requires them to find a new property insurer.

Numerous insurers have non-renewed select policies and some insurers, such as AIG, have decided to leave the entire state. AIG is not alone in doing this. Typically when home insurance companies choose to do this because they fear too many property losses.

When an insurer gets hit with too many claims all at once, it becomes seized by the responsible Department of Insurance and may be liquidated. In 2018, Merced Property and Casualty was hit, hard, by the Camp fire. Shortly thereafter “The court found that Merced was insolvent and there existed sufficient factual and legal grounds for the Commissioner to liquidate and wind up the business of Merced.” Source. This situation sent shockwaves into the insurance marketplace.

When clients lose their home insurance, hopefully they can find a new admitted insurer, sometimes a non-admitted insurer is their best bet. These non admitted insurers can be good options, but here too lays a signficant problem in that the non-admitted market is running into capacity restraints and pricing for many of these policies can be significalty higher than the normal admitted market.

Another option for consumers is to purchase a California FAIR plan with a DIC policy. These Combination policies are really two policies that work together. Two premiums, Two deductibles, often Two different sets of limits. Confusing to be certain. These DIC policies are becoming more common and in a way this is a small amount of good news. Consumers need to be super careful though when they make this selection as there are certainly better ways to create these combination policies. Buyer Beware.

The California FAIR plan though has its own share of problems. Orginally created in the 1960s as the insurer of last resort, the California FAIR plan is an exceptionally limited named peril policy that is currently relied on for its fire insurance use. In other words, many insurers are not willing to write fire insurance in California and lots of homeowners have no other options save the California FAIR plan. The CA FAIR plan is also not inexpensive.

The California FAIR plan has seen numerous debates and changes in the course of just the last five years, growing to become one of the largest insurers in the state. Recently the plan was upgraded to cover up to $3,000,000 in TIV [Total Insurance Value]. It started accepting Credit Card payments. There is a public debate about FAIR potentially also offering a more traditional HO3 policy after Commissioner Lara ordered FAIR “to offer a homeowners policy.” California DOI. This is distinct and different from the current exceptionally limited named perild dwelling policy that is currently provides.

But FAIR, doesnt want to do this. FAIR “sued Lara in December, arguing his order was illegal.” And according to the Claims Journal “a judge ruled this week…[that] A fund that offers only fire insurance to California residents in wildfire-prone areas can’t be required to provide coverage for other hazards such as flooding or theft” What does the future hold in this regard, I can only speculate. If I had to hazard a guess, I would say that I would expect more change.

In summation the California homeowners market is just a disaster. There are no two ways about it, as they say. Homeowners are being nonrenewed by their primary and legacy insurers and finding few if any good property insurance options. Affluent or more expensive homes face a far more dire situation. And that is just the personal lines property market for Fire.

The California Earthquake market, also is having a bit of an issue as two standalone earthquake vendors are not taking on new earthquake insurance policies. Some consumers might be unaware that land movement, including earthquake, are strictly excluded from home insurance. While many consumers depend on the CEA for this type of coverage, a private market definitly exists. Albeit with fewer EQ insurers than just three years ago.

In addition there have been rate increases in the earthquake market. In 2022 the CEA requesed a 3.8% rate increase, says AM Best. The rate increases though are not limited to the CEA. Its possible that these rate increases in the property market could continue.

The US Flood market, dominated by the NFIP, is going through a complete and total rerating of policies with their new NFIP 2.0: Equity in Action. What used to be simple and steady process is very much now changed. According to prevention web “77% of customers of the National Flood Insurance Program (NFIP) nationwide will see increases in their premiums...” This will surely assist the growing private flood insurance market in Marin and beyond, Flood premiums having been steadily going up for years, but this seems exceptional.

The market for Landslide insurance continues to be non existant. As in I cannot locate an insurer to take on true landslide insurance in Marin. That may not necesarily mean that it does not exist, but I cannot find it. [And yes the homeowner’s earth movement includes landslides, so homes are NOT covered from landslides.]

What do Landslide damage, Flood damage, Earthquake damage, and Fire damage all share in common? The additional higher costs to rebuild due to inflation. The inflation shock of 2021-2022 will have a signficant impact on costs related to rebuilding structures. It will take years for property policies to fully reflect new rebuild costs nationally as policies are typically only renewed once per year. These rebuild costs though are just one of two types of inflation.

The other inflationary issue is that of insurance inflation. “California regulators signed off on a pair of rate increases requested by State Farm General Insurance Co. in December 2020” so says S&P Global. Other states too are seeing rate increases. But California is particularly hard hit. Just wait till they tabulate these past several years of fire damage. Based on their chart other insurers seeing rate increase include: Farmers, Universal, Liberty Mutual, Universal North American in California alone. Other states too are seeing increases including Colorado, Georgia, and Oregon.

To be sure some of the “insurance inflation” is likely due to higher costs to rebuild, but some of it is purely an increased cost per dollar to provide cover. It is difficult to pull one from the other.

The way Insuance should work, at least in theory.

The Personal Umbrella market [and or personsonal excess Liablity] market has severly tighented. In recent years, several of my insurers for personal umbrella insurance have non-renewed policies, including one that has a particularly odd new requirement for consumers that all be assured clients would not keep their policies with them. In addition to a slightly lower quantity of carriers, I have seen lowering of limits and increased underwriting concerns. In other words, insurers are lowering the total liablity amounts offered and asking a lot more questions. Lastly the loss of AIG in this space can not be over stated as an issue.

Life Insurance too, has experienced a tightenting in the market. Life insurance “claims rose most in the United States, India and South Africa due to the more lethal variants [of COVID] and a rise in fatalities or illness among younger and unvaccinated groups.” Reuters. Life insurers seem to be more careful these days.

We have not even discussed business insurance issues related to COVID, which have been all in the news. But that subject matter is beyond the scope of this article about personal lines insurance.

There you have it, a quick list of the troubles in the California personal lines market. There are other challenges facing the state that I have not even gone into.

Hey – Speak with a licensed agent before making any decisions about insurance coverage. Thanks for reading.