July 18, 2023

Despite the growing list of issues that seem to separate California and Florida these days, there is one area that they have very much in common… severe and widespread natural disasters, and especially the adverse financial impact that these events are having on the availability of homeowners insurance. From extreme wildfires in California to hurricanes in Florida, to tornadoes in Texas and similar perils in other states, this is all causing insurance companies to simultaneously contend with costly risks on multiple fronts. In California, the recent decision by State Farm to stop writing new home insurance policies is just the latest—and so far, most striking—example of this growing problem. Allstate did this same thing last year, and other high-end insurers—like Chubb and AIG—have also significantly cut back on underwriting in recent years and not renewed coverage for many.

Big natural disasters cause lots of destruction all at once, which leads to imbalances in the supply and demand for rebuilding services; and this is happening on top of already inflated material prices due to pandemic-related supply chain constraints as well as overall higher general inflation. This is making it increasingly difficult for insurance companies to adequately price the risks that they are taking on. Plus, due to existing regulations in California, insurance companies doing business there are not allowed to pass along the cost of reinsurance (effectively insurance for insurance companies) which they use to offload some of their inherent liability and help minimize the impact of possibly getting hit with huge costs all at once. And reinsurance costs have climbed significantly nationwide (especially in disaster-prone states like fire-ravaged California and storm-battered Florida and Texas), so this is squeezing insurance companies and influencing their underwriting decisions.

In turn, this is all putting an increased burden on the Cal FAIR Plan in the Golden State, which is the insurance of “last resort” for homeowners who are unable to get other normal, private coverage. Moreover, the FAIR Plan is primarily funded by charges collected from insurance companies currently doing business in the state, so as the Plan grows in usage—and if it should get wiped out by a series of catastrophes—this will put potential further burden on those companies that stay in the state (in proportion to their share of the market); hence this is probably also part of what is causing some companies to simply stop doing business here. And this situation is not unique to California; a similar type of “last resort” pseudo-public plan in Florida (that has swelled in size in recent years) is receiving support from that state in preparation for the coming hurricane season.

This overall situation is particularly difficult for anyone with a mortgage on their house, or the intention to buy a house with such debt—which is very common—because mortgage companies typically require homeowner insurance to be in place to get, or keep, a loan. And if someone cannot find HO insurance, or loses it, then they will probably not be able to secure a mortgage. So, this is apt to have wider ripple effects on real estate values and other related considerations.

There are no easy answers to this evolving predicament. Insurance companies—and their regulators—need to fairly and adequately manage the increased costs that come with this risky new world in which widespread disasters can literally destroy tens of thousands of homes all at once. And should insurance companies be able to keep profitable business in the state—in supposedly safer areas—but cancel many other policies elsewhere? One could argue that the insurance industry may require utility-like regulation as it relates to potential universal coverage. Maybe something more like the California Earthquake Authority is needed for fire risk, with some type of similar public instrumentality—whether something new or an extended FAIR Plan—overseeing most fire coverage in the state. Whatever the eventual solution, homeowners are voters too and it will all surely get very political… if it hasn’t already.