HomeInsuranceCalifornians Face 'Devastating' Insurance Hikes

Californians Face ‘Devastating’ Insurance Hikes

California homeowners have seen the cost of their insurance surge in recent months, as several private insurers have stopped offering new policies in the state for fears of more frequent, devastating wildfires.

Chris Roche, a resident of the Golden State, told Newsweek that the homeowner insurance climate in the state “is nothing short of devastating.” His own insurance rate, he said, has recently gone up from $1,533 to $5,132 annually. In a conversation with a California State insurance commission agent he said he was told “that some [homeowners] are seeing increases of 1,000 percent.”

While he said he’s fortunate enough to pay the increase, “this might be completely devastating to the real estate market here,” he said. “I feel bad for the folks that are ‘just trying to make it.'”

While California has always been vulnerable to wildfires and devastating floods, these kinds of extreme weather events are expected to become more frequent and more severe due to climate change. This, in turn, is likely to increase the risk for homeowners and their insurers—a dangerous prospect which insurance companies do not find appealing.

Fearing a potential future deluge of damage claims in the near future, several private insurers have stopped offering new policies in the state, including State Farm and Allstate. The two insurers announced in November 2022 that they were cutting back their coverage in California due to wildfires risk.

Californians Face Devastating Insurance Hikes of 250%
Photo-illustration by Newsweek/Getty

Insurers have also pulled out because they’re unable to make up for the increased risk with higher premiums. In California, insurers cannot raise their rates above a certain threshold set by regulators—a move aimed at protecting homeowners from arbitrary price hikes.

“The original initiative was presented to the voters as a way to fairly control insurance costs under the assumption that California swings such a big hammer in the market as to the insurance providers, that we could dictate not only policy but pricing,” Jon Shahoian, who’s in the property management business in California, told Newsweek.

“Trouble is, it wasn’t fair and did not account for the recent dramatic inflationary spike in construction and labor costs, and the regulatory environment that adds costs due to mandated code upgrades at rebuilding. Also, climate change is a big factor in wildfires to be sure.”

“The reason people are having trouble getting insurance in certain markets is that regulators haven’t let the premiums keep up,” David T. Russell, professor of insurance and finance at California State University, Northridge (CSUN), told Newsweek.

“They’ve not approved or they’ve slowly approved rate increases. So insurance companies have been unable to keep up and therefore they’re losing money. And given that they’re losing money, they don’t want to sell more insurance in markets where they’re losing money.”

The situation is a lose-lose one for homeowners. “A lot of people are very frustrated because either their premiums are going up or they’re unable to get insurance at all or they have to seek it through, let’s call it, a side market that is much more expensive,” Russell said.

As a result of so many insurers taking a step back in the state, Californians have been left with limited options when shopping around for fire insurance, with many being forced to turn to the state’s fire insurer of last resort, the California FAIR Plan.

A Less Than Ideal Solution

FAIR Plan is a backstop insurer that steps in to cover California homeowners with basic fire insurance when no private insurer would do so. Created in 1968 following the brush fires of the 1960s, it’s not a state agency nor a public entity, but it’s backed by all property insurers licensed in California.

The California FAIR Plan specifies on its website that it considers itself as a “temporary safety net” for Californians struggling to find coverage, and not a permanent alternative to traditional insurers.

California wildfire
Firefighters protecting a home watch as retardant is dropped over burning hillsides in Hemet, California on September 6, 2022. California homeowners are struggling to find private insurers willing to cover their homes as the risk…

FREDERIC J. BROWN/AFP via Getty Images

The FAIR Plan isn’t an ideal solution for California homeowners, as rates are higher than the ones they can find in the traditional market and additional plans are necessary to cover liability, theft and water damage. But finding an alternative within the traditional market has become difficult.

Steve Tolle, who has lived with his wife in the foothills east of Sacramento since 2015, told Newsweek that State Farm covered his home for six years before letting him know it was not issuing new policies in his location.

Tolle got temporary coverage from Lloyds of London and then from Merced Insurance, which went under after Camp Fire in 2018 and left him “scrambling” to find a new policy. He got a new policy from Lloyds but four months in, he was told it would not renew his policy once expired.

“The only option after that was the Fair Plan, the state’s insurer of last resort for fire, plus a wrap-around policy from Travelers,” Tolle said. “I believe the combined policies ran around $3,400 (2020). Since then, $3,800 (2021), $4,200 (2022), $4,500 (2023), and $5,600 (2024).”

Fortunately, Tolle and his wife have been able to afford these increases, “but at some point, it will cause us to reassess if it keeps going up by $100 a month every year,” he said.

The difficulty in finding home coverage could have a profound impact on the California housing market too. “If you don’t have an insurance policy, it’s basically impossible to take out a mortgage,” Benjamin Keys, an economist and a professor of real estate and finance at the University of Pennsylvania’s Wharton School, previously told Newsweek.

“And given the important role that financing plays in the housing market, without a functioning insurance market you don’t have a functioning mortgage market, you don’t have a functioning housing market.”

The family of California homeowner Laurie Sampson is now on their third insurance carrier in 11 years. “We are currently forced to use the California FAIR Plan for fire and wind coverage and Farmers Insurance for liability and other property damage,” Sampson told Newsweek.

“Our rates went from $4,300 for 2023 to $9,700 in 2024. We are located in a very high fire zone and I do understand the risk to the insurance companies but when banks require insurance on mortgaged properties what choice do homeowners have?” Sampson said.

“Our home is paid in full and we have had many conversations about when we should make the decision to risk going without coverage and hope for the best.”

For Russell, there’s going to be a lot of instability in insurance markets like the ones in California and Florida, which is also struggling with a crisis of its own, before solutions are found.

“There have been some reforms that are either past or underway that are designed to stabilize the market,” he said. “They will cost more for consumers or change the way certain claims are handled.”