Limited home insurance options in California as major carriers pull back

Key takeaways

• Since late 2022, seven of the 12 largest home insurance companies in California have either completely paused or greatly limited new home insurance applications, destabilizing the insurance market.

• Allstate and State Farm are not currently accepting new applications for California home insurance, while Farmers has scaled back the number of policies it plans to write. USAA plans to implement stricter wildfire safety standards for new home insurance policies, but it remains unclear how these new guidelines will affect current policyholders. Travelers and Nationwide have also placed restrictions on new policies, and Chubb has stopped writing policies in high-risk wildfire areas.

• Insurers have pointed to current California insurance laws, increased wildfires and costly reinsurance premiums as their main reasons for the new coverage limitations.

• California Insurance Commissioner Ricardo Lara launched the California Sustainable Insurance Strategy in September 2023, the most far-reaching insurance reform in decades.

California is home to nearly 40 million people, 55 percent of which are estimated to own homes. If you are a current or prospective California homeowner, finding affordable home insurance may be a challenge. The state’s high wildfire risk has historically been a concern for insurers, but increased wildfire severity and rising home construction costs have finally pushed some insurers to a tipping point. Seven of California’s largest property insurers, State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb recently decided to limit new homeowners policies in the Golden State, raising questions about the stability of the California home insurance market.

Bankrate’s insurance editorial team is closely tracking the California insurance market and conducted a deep dive into what California homeowners may need to know about securing an insurance policy in these increasingly challenging circumstances. We’ll explore why some insurers have opted to pause writing new home policies and what this could spell for the future of homeownership in California.

How is California’s home insurance market changing?

Although California’s home insurance landscape has made headlines more recently, like Florida, trouble has been brewing beneath the surface for years, with coverage challenges ramping up in late 2022. The timeline below illustrates how some of California’s major home insurers have reevaluated their role in the California home insurance market:

• Nov. 2, 2022: Following its 2022 third-quarter financial results, Allstate quietly paused writing new homeowners and condominium insurance policies in California. In an email to Bankrate, a spokesperson for Allstate stated that “the cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums.” In its third-quarter findings, the insurer noted that it will continue to cover its existing customers.

• May 26, 2023: State Farm announced that beginning May 27, 2023, it will no longer accept new applications for all businesses and personal property and casualty insurance but that its decision will not impact personal auto policies. Similar to Allstate, State Farm also credited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

• July 7, 2023: The San Francisco Standard is one of the first to report that Farmers will write a more limited number of home insurance policies in California. Unlike State Farm and Allstate, effective July 3, 2023, Farmers will continue to write new policies at “a level consistent with the volume [it] projected to write each month before recent market changes,” per the company’s official statement. Similarly to Allstate and State Farm, Farmers also highlighted “record-breaking inflation, severe weather events, and reconstruction costs continuing to climb” as its reasoning behind the coverage limit.

• July 21, 2023: AmGUARD and Falls Lake Insurance filed withdrawals with the California state insurance regulator. AmGUARD, a subsidiary of Berkshire Hathaway’s GUARD Insurance, has around 50,000 active home policies in California, while Falls Lake only writes around 900. AmGUARD and Falls Lake will no longer write any new home insurance policies in California and drop active policies at their renewal dates.

• Aug. 2, 2023: Beginning in October, Safeco plans to drop home insurance policies across San Francisco and the broader Bay Area. It is estimated that around 950 policies will be impacted by the decision. In an email to The San Francisco Standard, a spokesperson from Liberty Mutual (Safeco’s parent company) cited earthquake and home fires risk in concentrated areas as the motivation to cut ties with certain ZIP codes. Policyholders who have continuously been insured with Safeco since 2000 will not be affected, nor will California customers outside of the Bay Area.

• Aug. 30, 2023: USAA announces it will begin to limit California home insurance coverage in March 2024. USAA plans to tighten its wildfire safety standards and only insure homes with a wildfire risk score below 12, with 32 being the highest possible. In its rate filing with the California Department of Insurance, USAA named “expected rate inadequacy” as its reasoning behind the new guidelines. On top of the stricter wildfire safety ratings, two of USAA’s subsidiaries — USAA Casualty Insurance Company and Garrison Property and Casualty Insurance Company — will no longer accept applications for previously uninsured homes. Instead, the two companies will only consider applications for customers who are replacing already-active home insurance policies.

• September 21, 2023: Shortly following an executive order from Governor Gavin Newsom, California Insurance Commissioner Ricardo Lara publicizes his Sustainable Insurance Strategy, a multi-level approach to stabilize the home insurance market.

• January 24, 2024: The Hartford announces that beginning February 1, 2024, it will no longer write new property insurance policies in the state. The Hartford only writes about about 2 percent of California’s home insurance policies, but through its partnership with AARP, senior homeowners could be heavily impacted.

Why are insurers limiting new policies in California?

Combined, State Farm, Allstate, Farmers USAA, Travelers, Nationwide and Chubb dominated just under 35 percent of California’s home insurance market in 2022. With seven major California home insurance providers either pausing or limiting new home insurance policies, and smaller insurers following suit, it begs the question — how did we come to this?

There is no one answer to why each provider has decided to pump the brakes on the California home insurance market. Rather, there are several key reasons. California’s state insurance regulations, inflation, increased wildfires and heightened reinsurance costs have all contributed to the current California home insurance crisis.

Proposition 103 and the California Department of Insurance

If it has become increasingly expensive for some of California’s major insurers to take on new California home insurance policies without limitations, why can’t they just raise their premiums to adjust? The answer lies with a 36-year-old piece of California state legislature, Proposition 103.

Proposition 103, or Prop 103, was passed in 1988 to protect insurance policyholders from unjust rate hikes across auto, property, life and casualty insurance. Under Prop 103, insurance companies are required to submit rate increases in excess of 7 percent for approval by the California Department of Insurance. Like any process that involves government approval, it typically comes with red tape.

The government isn’t the only one who can clog up the process: “interveners” — either consumers or their representatives — can step in and contest rate filings. Proposition 103 allows these interveners to sue insurance companies and force them to pay the costs associated with the lawsuit. Insurance interveners are unique to California and have been hotly contested over the years, with some claiming that the process does more to line interveners’ pockets than it does to aid actual homeowners. Just like government approval, the intervener process can grind the rate filing process to a near-halt.

Proposition 103 grants insurers the right to rate approval in 60 days. However, the California Department of Insurance currently requires insurers to waive their Prop 103 rights to a fast rate approval. The approval process, which typically averages about six months, slows down the rate-raising process, essentially freezing home insurance rates at an unsustainable rate. With unsustainable rates in place and no quick course of action to raise them, insurers may be forced to limit new policies to remain financially solvent.

Bankrate’s premium data from Quadrant Information Services indicates that the annual average cost of home insurance in California is $1,217 for $250,000 in dwelling coverage, which is about 28 percent less than the national average. Proposition 103’s stringent rate increase limitations keep California’s home insurance prices artificially low.

The California Department of Insurance not only inhibits how much insurers can raise rates, but also how they are able to calculate rate changes. California insurers have been historically unable to incorporate wildfire modeling into rate calculations and are limited to historical data when determining rates. Meaning, they are unable to look at recent wildfire damages in order to predict future potential costs. While this may have worked in the past, California’s wildfire risk has escalated from dangerous levels to unprecedented.

Wildfires

California is home to a suite of different natural disasters. Earthquakes, landslides and wildfires devastate the natural landscape and put millions of homes at risk for catastrophic damage. Sometimes, disasters even go hand-in-hand. After a wildfire, burnt soil becomes more water-repellant, allowing even small amounts of rainfall to produce a flood or landslide.

California’s wildfire risk is unlike any other state. Over two million homes in California are considered at high or extreme risk for wildfire damage, and the state continues to top lists of most acres burned per year. Even more frightening, wildfire season has expanded from a couple of months to over half the year.

And the problem is getting worse. A study from the International Journal of Wildland Fire purports that “climate change has played a central role in the changing nature of California wildfires and will likely continue to do so…the climate of California became warmer and more arid from 1980 to 2020, exceeding earlier 20th century conditions and likely those of the past 1000 years.”

Wildfires are not only dangerous and increasingly pervasive, but they are also expensive. The National Interagency Coordination Center estimates that, in 2022 alone, California fires cost almost $380 million in damage.

Keep in mind: Without the recourse to raise rates to account for the astronomically high cost of wildfire losses, some California insurers are all but forced to limit new policy applications in order to have enough funding in reserve to pay out current policyholder claims.

Inflation

Inflation has affected everything from the cost of a dozen eggs to airline tickets and, most relevant to home insurance, the cost of rebuilding materials like wood and shingles. From January 2019 to June 2023, the producer price of construction materials increased by nearly 40 percent. To put this figure into context, the consumer price index peaked in June 2022 at 9.1 percent. Although inflation has cooled since summer 2022, experts agree that it continues to present problems for homeowners.

can forecast and adjust to inflation, but volatility in prices, accelerating natural disasters and challenges on the regulatory front are proving to be making it difficult to overcome these rapidly moving puzzle pieces. In turn, that’s making it difficult for current and prospective homeowners to access and or afford home insurance.” source=”Mark Hamrick, Bankrate Senior Economic Analyst” image=”https://www.bankrate.com/2023/03/17104056/mark-hamrick.jpeg”]

Such drastic rises in raw construction costs pose serious risks to insurance providers’ financial solvency. When you pay your insurance premium, an insurer takes part of that payment and puts it in reserve, which it uses to pay out claims. If claims become too expensive — and too frequent — the insurer may be unable to make good on its promise to pay them out.

High cost of reinsurance

Inflation and climate change may be familiar topics, but reinsurance could be a new term for many homeowners. Reinsurance is an insurance policy for insurance providers. Here’s how it works: insurance providers are in the business of selling policies to their customers. If a swath of policyholders all file claims at once (like they may after a natural disaster, such as a wildfire), an insurer could be at risk for financial insolvency. That is where reinsurance steps in; a reinsurer can help cover losses over a certain threshold.

Reinsurance may be especially helpful to home insurers with policyholders in wildfire risk zones like California. However, reinsurance costs are on the rise. Property reinsurance premiums have risen 50 percent from April to July 2023, according to a report from Gallagher Re, a global reinsurance broker. When speaking with Bankrate, Janet Ruiz, the Director of Strategic Communications for the Insurance Information Institute, drew a parallel between the challenges currently facing both the California home insurance and reinsurance industries, stating that “prices have gone up significantly due to the same reasons: inflation, climate risk, etc.”

What’s next for the California home insurance market?

On July 13, 2023, the California Department of Insurance held a public workshop to discuss modernizing Prop 103 to allow insurers to apply wildfire modeling to their rate calculations. Catastrophe modeling is already used to calculate earthquake endorsements and for fires following an earthquake. If Proposition 103 were amended to account for wildfire modeling, it might persuade home insurance providers to lift their policy limitations.

The California State Legislature 2023 session ended on Thursday, September 14th. Rumors swirled about a hail mary bill intended to entice California home insurers to return to the state, but the bill died before legislators were able to submit a formal proposal. According to Politico, the bill would have allowed California insurers to raise rates more easily in the hopes that higher rates would be enough to encourage insurance juggernauts to return to the state.

After the bill failed, California Governor Gavin Newsom issued an executive order on September 21st calling for “prompt regulatory action” to “improve the efficiency, speed and transparency of the rate approval process.” The order will allow the California state legislature to draft new rules that will permit insurers to use wildfire modeling in rate calculations — but under the condition that insurers agree to write more home policies in high-risk fire zones. While this does not fully overturn Proposition 103, it sends a strong message from the Governor’s office that Prop 103 is due for an update.

California Sustainable Insurance Strategy

In the days following Governor Newsom’s executive order, California Insurance Commissioner Ricardo Lara announced the Sustainable Insurance Strategy. “Sustainable” has a dual meaning, here: Lara’s reforms are intended to bolster the longevity of the California home insurance market and address climate change. They are the largest insurance reforms since Prop 103 was written in 1988.

The plan takes a four-pronged approach:

• Get major insurers to write policies for high-risk areas: The California Department of Insurance is looking for the top 12 home insurance companies in the state to commit to writing a minimum of 85 percent of their policies in underserved areas, particularly in high-risk wildfire zones.

• Unburden the FAIR plan: Homes and businesses that adhere to the “Safer from Wildfires” mitigation regulations will be given first priority to get off the FAIR plan and return to the private market.

• Permit catastrophe modeling and mitigation: This part of the insurance reforms allows insurers to use catastrophe modeling to set more accurate rates. Additionally, more home insurance discounts will be offered to consumers who have hardened their homes against wildfires.

• Update the FAIR plan: This last point is primarily concerned with commercial insurance and aims to increase commercial coverage limits of $20 million per structure.

Allowing catastrophe models and rewarding mitigation efforts are something of a double-edged sword for consumers. On the one hand, it may be enough to encourage some of California’s insurance giants to return to the market. With catastrophe modeling for wildfires, insurance companies may finally be allowed to price their policies at a level that matches risk — one of the key points that drove them out of the state in the first place. However, this will likely spell heavy home insurance increases for policyholders across the state.

State Farm has already gotten approval for 20 percent average home insurance rate raises, which are expected to go into effect on March 15, 2024. While increasing the number of discounts for mitigation efforts may help with this, it yet to be seen whether or not it is an even trade-off.

Wildfire mitigation

Mitigation is also crucial both in stabilizing the California insurance market and in the fight against wildfires. The best way to confront wildfire damage is to address the state’s high wildfire risk, which is what California legislation is working to achieve statewide and more locally. After sustaining severe damage from the 2018 Camp Fire, the town of Paradise updated its building codes to include fire mitigation regulations. New buildings are made with fire-resistant materials and adhere to strict regulations to ensure they are wildfire-prepared.

California is home to the country’s largest state economy and ample insurance opportunities, making it a desirable state for insurers to do business in. According to Ruiz, State Farm, Allstate and Farmers are each actively working with the Department of Insurance to arrive at a solution that will benefit insurers and new homeowners looking to financially protect their homes.

Increased burden on California’s FAIR Plan

California’s home insurance market does need changes, but they will not happen overnight. While homeowners and insurers alike await industry overhauls, it places mounting pressure on California’s FAIR plan. The FAIR plan is a last-resort home insurance option for homeowners who have been unsuccessful in the private market. If your home is extremely high risk, such as those located near wilderness areas with high wildfire potential, you may be able to apply for a policy through this plan.

The FAIR plan is financially supported by California’s private home insurers, with each insurer’s support of the plan tied to their market share. As home insurance options dwindle and more homeowners rely on the FAIR plan, it could spell further disaster, according to Fraizer: “The potential capital call is growing as the FAIR Plan grows and, when they finally need to call for cash, it will lead to market chaos. After paying the cash call, insurers are not permitted, under current law, to recoup that money in future rate filings. The FAIR Plan’s growth is creating an incentive for carriers to reduce their assessment liability by reducing their market share.” This is another potential benefit of the Sustainable Insurance Strategy. If insurers are able to calculate rates differently, it could lead to less pressure and unsustainable reliance on the FAIR plan.

How can California homeowners secure affordable coverage?

Hearing that major insurers have limited or completely paused writing new home insurance policies can be stressful for those who own homes in California. The California Department of Insurance has safeguards to protect certain homeowners from policy nonrenewals. If you live in a wildfire area, your insurer cannot issue a cancellation or nonrenewal on your home insurance policy for one year following a governor-declared state of emergency. If you are not sure if your home qualifies, you can check your ZIP code online.

If you are a new California homeowner looking for a policy, you likely still have options in terms of coverage.

California home insurance options

Many of the best home insurance companies in California are still receiving new homeowners insurance applications. In fact, there are still over 100 insurers writing home insurance policies across the Golden State. While searching for a new policy, you may want to consider the following:

1. Evaluate your needs. Before you begin shopping, you’ll first need to know how much home insurance you need. The answer won’t be the same for everyone: your personal belongings, your home’s characteristics, where your home is located and your own comfort with risk will determine what policy type you could need, what endorsements may be relevant for you and how much coverage you may want.

2. Make a list of priorities. If getting an affordable policy is high on your priority list, you may want to look at providers that offer cheaper rates. Or, if you require specialty coverage, you might consider insurers that offer unique endorsements. Wildfire will likely be a named peril in your policy, but you may want to purchase an earthquake endorsement as well.

3. Gather quotes. Once you have a stronger idea of what you’d like your policy to look like, you can begin requesting and comparing home insurance quotes. During the quote process, you can also get a better understanding of costs for additional coverage types.

Frequently asked questions

• • To clarify, State Farm, Allstate Farmers USAA, Travelers, Nationwide and Chubb are still active in California, they have just either limited or stopped writing new home insurance policies. Current home insurance policies with these providers are still being honored. Home policies from AMGuard and Falls Lake, on the other hand, will not be renewed. For the time being, it is unclear whether more insurers will continue the trend.

  • For Californians, perhaps the biggest hurdle for financial protection from wildfires is getting an insurer to write you a policy. Home insurance policies cover wildfires, however, if you are in a high-risk fire area an insurer may deny coverage based on the risk your home presents. Other carriers may offer you coverage but exclude wildfire as a covered peril. If you’re looking for more robust coverage, you may find your options in California to be more limited compared to several years ago.

  • Home insurance in California is not a legal requirement. However, if you have a mortgage or loan on your home, your financial lender will likely require you to carry a certain amount of coverage.