A new version of this post can be found below. Updated 7/13/2023.

Nearly five years ago we predicted California homeowners would experience non-renewals, closing zip codes, “high fire hazard” surcharges, and a shrinking number of options as companies left the market altogether. All that was predicted has come to pass, culminating recently when the nation’s largest personal lines insurer, State Farm, decided to stop writing home insurance in the state.

So where does that leave homeowners? What can they do to try and best navigate the current environment that is sure to further deteriorate? And what do we at Old Harbor expect to happen over the next three to five years in the state?

Let’s begin with some context and a few predictions, which influence our recommendations.

Regulatory Issues and Their Impact:

On September 7, 2022, the Insurance Commissioner, Ricardo Lara, rolled out a wildfire regulation to “drive down the cost of insurance.”  We disagree with this move, think it is short-sighted, and believe it causes more problems than it hopes to solve. This additional regulation will further slow the return to a normal, healthy market because insurance companies won’t want to be subject to Lara’s guidelines. California is already a very difficult state for insurers, and adding more hurdles for carriers to do business won’t help.

In California, it commonly takes years for an insurance company to get approval to increase rates — in all of 2022 there were no rate increases approved by the Commissioner. It not only takes an exorbitant amount of time for a rate approval, the amount of the increase is also restricted by the Department of Insurance.   Increases are a critical function of a healthy insurance market. The things insurance pays for – property damage such as repair materials and labor, medical bills, etc. – all increase unimpeded with inflation. If costs are increasing but carriers cannot raise rates, it creates an imbalance.

Insurance carriers are in business to make a profit. A growing number of them are seeing too many red flags and don’t believe they can profitably do business here any longer. Companies like Geico and Allstate left California more than a decade ago. Many companies have quit California home insurance, and only time will tell if they decide the insurance business in California is worth the regulatory headaches.

The number of insurance options for homeowners is shrinking. Insurers still open for business are being extremely scrupulous in their underwriting and charging much higher premiums for coverage.

This year has seen some rate approvals from the Department of Insurance, but not nearly enough for what’s needed. Insurance companies that received increase approval still aren’t accepting new business and are immediately filing for an additional increase. We expect this dance to continue for at least another year or two. The companies simply are not eager to enter the home insurance market without a rate that they’re confident in.

Predictions on California Home Insurance

1. Non-renewals are going to continue at an increased rate. There is a lot of underpriced home insurance that companies are on the hook for. They’re going to attempt to get off all of it over the next few years.

   State Farm will no doubt be the biggest culprit. As a supporting anecdote: We had a customer with a home whom we had a competitive rate of $3,500 for their home insurance. State Farm wrote the risk for $780. Less than 25% of what the rest of the market. There is no way they can get the insurance premium up to an adequate place in any reasonable period of time, and they’ll be forced to non-renew the home. Multiply that scenario thousands, tens of thousands of times. It’s going to be a mess.

2. Rates for new insurance policies will be double, triple, and more than what most existing homeowners are paying. Non-renewals will take time to process through, and lots of policies initially written to pre-2020 that have continued to be renewed are very underpriced.
3. Homeowners in “high fire hazard” areas such as Big Bear, Lake Arrowhead, Mammoth, Lake Tahoe, and anywhere near a mountain will not have an alternative to the California Fair Plan for at least three more years.
4. No new insurance companies in the state for the next three years at a minimum. Berkshire Hathaway, the best capitalized and arguably most disciplined insurer in the world, entered the California market in 2019. They didn’t have the significant losses of 2013-2018 burdening them like every other major insurer in the state. However, even with the benefit of no heavy wildfire losses, after just four years here, they’ve almost completely stopped writing policies. Berkshire has struggled, and you can be certain other carriers have observed such and are very cautious.

Actions to Take as a Homeowner

1. Increase your deductible and avoid filing small claims. Filing a small claim makes no financial sense for a homeowner as filing a claim is more than likely to result in a premium increase of no less than 100% at renewal for the next 3+ years. We encourage all our clients to budget at least 1% of their home’s value per year to cover unexpected costs associated with homeownership. In the event of a significant event, such as a pipe burst, kitchen fire, dog bite, or something else, we encourage filing a claim and using their budgeted funds to cover the insurance deductible.

   In addition to better positioning your insurance, increasing your deductible will often save you at least a few hundred dollars per year on your home policy.

2. Package your auto insurance with the same company. It’s indisputable that having your home and auto insurance with the same company helps keep coverage for longer and at a lower rate. Monoline (home with no auto) is less desirable to insurance companies for a couple of reasons. First, those customers tend to leave quicker. And secondly, they generally file claims at a higher rate and are less profitable. When it comes to surviving the pending wave of non-renewals, combining your auto insurance is the best preventative step you can take. Not to mention that combining your auto insurance will save you hundreds, or thousands, in premiums a year.
3. Comply with requests from your current insurer and create defensible space around your home. Many companies are sending out “clean up” requirements on homes, requesting photos of the property, requiring self-inspections, and more. We cannot stress the importance of promptly addressing their request. Companies are doing this to help weed out customers they can’t non-renew – if you don’t comply they are not giving any grace, and your rates are going to be much

There are 18 steps to effectively creating defensible space around your home. We recommend doing as many as possible and submitting documentation to your insurance representative. Keep in mind that these are proactive measures, meant to improve your cost and chances of keeping coverage. While unquestionably helpful for many, there will be some policies that will be dropped even with all possible measures performed.

Please find the original post from August 16th, 2018 below:

At the time of this writing, there are two active fires (Carr, Ranch) in California that have consumed over 200,000 acres and a handful of others burning throughout the state. Earlier this summer, the Ferguson fire burned nearly 100,000 acres.  Last year, the Thomas fire ravaged Ventura and multiple fires in northern California destroyed vast amounts of the Santa Rosa and Napa areas. Events previously thought to be once-in-a-decade are now occurring regularly, and they’re forcing home insurance carriers to take hard looks at their underwriting and pricing.

Below is a list of potential actions we expect California home insurers to take in response to the recent uptick in catastrophic losses.

1. Non-renewal of existing in policies in “high fire hazard” areas – AAA has already begun this process, and has had a significant impact on homes located in Fallbrook and areas of North San Diego County. Many of the households being non-renewed have been with AAA for decades – this should serve as a reminder that an insurance company is not loyal to any one policy holder. AAA is not the first to do this, and they certainly won’t be the last.
2. Closing zip codes and communities from coverage – Households that live in mountain communities will be familiar with this as the majority of carriers have already closed zip codes and will not write coverage. In the local mountain areas such as Big Bear and Lake Arrowhead, there are only a few insurance options. It is entirely possible that homeowners within a half-mile of natural hillsides will end up with only a small handful of carriers willing to write their home insurance.
3. Surcharges for properties in “high fire hazard” areas – Some carriers have already placed wildfire surcharges on a small selection of homes. The amount of homes being surcharged and the size of the surcharges should increase significantly.
4. Complete exit of the home insurance market – There are nationally recognized insurance carriers such as Geico and Allstate that do not write home insurance in California. After what’s transpired over the past 18 months, they look brilliant. It wouldn’t be surprising to see more companies follow their lead and cease issuing home policies in California. Edit: Just today, we received notice that American Reliable Insurance Company will cease writing Homeowner and Dwelling Fire in California as [those lines of business] have proven extremely unprofitable

The biggest mistake to that can be made is to assume that you have the correct coverage or that your home will never burn. There are many actions you can take to prepare for, and help offset, increasing premiums. Please give us a call for a free consultation.

DISCLAIMER: This article is provided for general informational purposes only and should not be relied upon for legal advice. Old Harbor Insurance Services, LLC recommends you consult your risk manager, attorney, business adviser, or insurance representative for all questions or concerns.