Important Update: Home Insurance Changes in California

Important Update: Home Insurance Changes in California

  • Hamid Koochak
  • 06/17/23
Recently, State Farm and Allstate declared that they will discontinue the sale of new home insurance policies in California owing to the rising wildfire risks and increased construction costs. Below are some important details to consider:
  1. State Farm and Allstate are not leaving the California Insurance Market:  State Farm and Allstate will continue to serve and renew policies for their existing clients in California, and also offer new auto insurance policies. However, they have temporarily suspended issuing new property insurance policies in the state.
  2. What are the implications of the decision for prospective homebuyers?  In some parts of the state with high risk factors, there are limited options for insurance companies to provide new policies. State Farm is currently the only private insurer offering policies in certain high-risk areas. If the Insurance Commissioner is unsuccessful in encouraging more private insurers to offer policies in these areas, residents may have to rely on the more expensive California FAIR plan as their only option for property insurance.
  3. Why did State Farm and Allstate stop issuing new policies?  According to State Farm, they have made the decision to discontinue their offerings due to significant increases in construction costs exceeding inflation, a rapidly growing exposure to catastrophes, and a challenging reinsurance market. Meanwhile, Allstate has temporarily paused its offerings to ensure the continued protection of its current customers. It is important to note that the decisions made by State Farm and Allstate do not necessarily reflect the actions that other companies may take..
  4. Will more companies follow State Farm and Allstate's move?  Although there are many companies writing policies in California, fewer are willing to write new policies in higher risk areas. In fact, with the recent departure of State Farm and Allstate, those living in these high-risk areas may have no other option than the FAIR plan.
  5. What are the main problems for the insurance market in California?  In California, the insurance market is subject to rigorous regulations and strict rate increase requirements that were established by Proposition 103 in 1988. Nevertheless, there are two areas where minor changes could potentially create a more favorable environment for insurers while still maintaining consumer-friendly rate increase requirements. These include allowing insurance companies to adjust rates to reflect their reinsurance costs more accurately and permitting them to use forward-looking risk models. Presently, companies are only permitted to consider past data when determining rates. However, insurance companies argue that this approach fails to adequately capture risk in light of the growing concerns surrounding climate change.

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