Last month insurance giant State Farm announced that it would stop issuing new policies covering homes in California. The move follows several other companies including Allstate, American International Group and Chubb, that also quietly began withdrawing from the California home insurance market last year.
The exodus is yet another sign of the impact climate change will have on the coast, but, for now, new home buyers still have some options.
State Farm’s announcement said the company “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” Devastating wildfires in California that can rapidly engulf hundreds of homes pose a particular threat to the bottom line for the company that has the largest portion of homeowner policies in the state.
Reinsurance refers to the coverage that insurance companies purchase to cover their own losses. The cost for that coverage has risen steeply in states such as California, Texas and Florida where climate-driven disasters are occurring with increasing frequency.
Due to the company’s share of the market, State Farm’s action has a significant impact, but the trend it represents is not new. According to data tracked by the California Department of Insurance, the number of insurer-initiated policy non-renewals and cancellations jumped following wildfires in 2017 and 2018 and hit a record high of 241,662 in 2021. Although that number does not distinguish among the various reasons for cancellations, insurers are increasingly likely to exclude high-risk properties.
State Farm brokers in Pacifica and Half Moon Bay are reluctant to discuss the impact of the new corporate policy and referred inquiries to the corporate office. Company policy also prevents them from suggesting alternatives to new homeowners seeking coverage, which is almost always required when applying for a mortgage.
Joshua Romano, an agent for Farmers Insurance in Pacifica, said there has been too much hype in response to the State Farm announcement.
“There are always going to be times when things are limited, but it’s cyclical,” he said. He pointed to developments after the Northridge earthquake in 1994. Then, too, insurance companies dropped out of the market and, as a result, the California Earthquake Authority was established.
Romano said that Farmers continues to issue homeowner policies and the company allows agents to find other insurers for their clients if, for some reason, Farmers cannot cover them. Although he understands that insurance companies will do their best to make a profit and thus potentially exclude areas such as
canyons where risk is higher, Romano does not see a cause for home buyers on the San Mateo Coast to be concerned. “They don’t
want to shut down all of Pacifica and Half Moon Bay,” he said.
One option that homeowners rely on is the California Fair Plan, a pool created by all insurers in the state to provide coverage where individual companies do not offer it. Romano said that the Fair Plan is not intended to replace all homeowner policies formerly offered by the separate insurance companies.
“It’s not meant to be a stop gap, but right now there isn’t an alternative,” he said.
