Property Insurers Curb New Policies in Cat-Prone Areas Nationally

Insurance companies are pulling back on homeowners’ policies in vulnerable areas nationally out of fear of floods, storms and fires made worse by climate change and soaring costs of rebuilding.

Source: WSJ | Published on June 9, 2023

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Insurance companies are pulling back on homeowners’ policies in vulnerable areas nationally out of fear of floods, storms and fires made worse by climate change and soaring costs of rebuilding. AIG is planning curbs on home-insurance sales to affluent customers in some 200 ZIP Codes across the U.S. at high risk of floods or wildfires, people familiar with the matter said. The states affected include New York, Delaware, Florida, Colorado, Montana, Idaho and Wyoming, the people said. AIG has already restricted new business in California.

In a little-noticed pullback, Farmers Group earlier this year stopped offering new home-insurance policies in hurricane-prone Florida. A spokesman said that “with catastrophe costs at historically high levels and reconstruction costs continuing to climb,” the pause was designed to help Farmers more effectively manage its risk exposure.

State Farm and Allstate, meanwhile, are pulling back from California’s home-insurance market. The shift is making it hard for some home buyers to get insurance and is sparking fierce wrangling over what is most to blame: climate change, inflation or regulations.

Insurers in California say regulatory curbs on pricing mean they can’t recoup an inflation-driven surge in rebuilding costs, as well as rising losses from wildfires.

Payouts on claims to California homeowners more than doubled in 2019 through 2022, while premiums increased by only around a third, according to the American Property Casualty Insurance Association, an industry group.

Consumer advocates accuse the major insurance companies of using their market power to push back on policyholder protections. “They’re trying to bully their way out of oversight,” said Douglas Heller, director of insurance at the Consumer Federation of America. “They’re exploiting the moment to get something they’ve always wanted.”

State Farm and Allstate declined to comment on the suggestion that they are trying to pressure regulators.

The insurers’ moves leave homeowners with fewer choices or, in some cases, no choice at all, according to insurance brokers.

In California, State Farm and Allstate were “the only game in town” for multimillion-dollar homes in wildfire-exposed areas such as Lake Tahoe or Carmel, according to Jim Tolliver, a San Francisco-based broker with Woodruff Sawyer.

The decision by insurers to stop writing new home-insurance policies means properties including a Beverly Hills mansion that Tolliver is trying to find coverage for might not be insurable, he said. Allstate and State Farm are two of the five biggest insurers in the state. California has an insurer of last resort, the Fair Access to Insurance Requirements Plan, but that is expensive and offers bare-bones coverage of at most $3 million.

“California is a broken insurance system,” Tolliver said. “It’s a ticking time bomb.”

Ricardo Lara, the state’s insurance commissioner, disagrees, saying insurers in the past have paused and restarted writing policies. “We have been here before after wildfires and market changes,” he said. Lara, an elected official, added that the pullback won’t deter his staff from scrutinizing insurers’ pricing strategies “to prevent unjustifiably high rates.”

The question of what rates are justified is a thorny one.

California hasn’t been a consistently bad place for companies to sell home insurance in recent years. The average loss ratio, which measures claims in relation to premiums, on these policies was better in the state than in the U.S. as a whole in six of the 10 years through 2022, according to the ratings company AM Best.

But wildfires, increasing in severity and frequency owing to climate change, have taken a toll on insurers’ earnings. Since the start of 2017, seven of the eight wildfires with the highest insured losses have occurred in California, according to the insurance brokerage Aon.

Reinsurers, which companies including State Farm use to take on some of the risks of the policies they sell, have reacted to escalating losses on catastrophes by pushing up their prices. Rates for property-catastrophe reinsurance policies renewed on June 1 rose 33% on average, according to a recent report from the reinsurance broker Howden Tiger.

Adding to these pressures, the postpandemic rise in inflation and supply-chain glitches have pushed up rebuilding costs. Reconstruction costs, including the cost of labor and materials, have risen 25% in California since the start of 2020, according to the analytics company Verisk.

“With inflation so high, insurers don’t have much profit padding to carry them through a market where they’re taking short-term losses,” said Amy Bach, executive director at the consumer-advocacy group United Policyholders.

State Farm’s Californian property-insurance arm posted a $312 million underwriting loss for the first three months of this year, more than its $241 million loss for all of 2022, according to public records.

Lara, the California insurance commissioner, said insurers have failed to ask for the rate increases they need. A law passed by California voters in 1988, known as Proposition 103, requires insurers to get approval from the commissioner for rate increases. Requests for hikes of more than 6.9% can go to a public hearing, which typically means a decision takes 18 months or more, according to industry insiders.

Insurers typically asked for increases below 7%, sometimes more than once a year. State Farm and Allstate have now put in for much higher increases. State Farm requested a 28% raise in March, and Allstate last month put in for a 39.6% boost, state records show.

Allstate blamed California’s rate-approval system for its decision to pause new applications, saying it meant adjusting prices quickly to reflect the inflationary increases in rebuilding costs wasn’t an option. As a result, “The cost to insure new home customers in California is far higher than the price they would pay for policies,” the company said in a statement.

Insurers are pushing for changes to the state system to allow them to increase premiums more readily. They argue that climate change means that the current system of using historical claims data only, rather than also using models of potential wildfires, doesn’t accurately reflect the risks. The industry is also advocating for being allowed to reflect reinsurance costs in their requests for premium increases.

Even without the changes that the industry wants, rates are already going up a lot in the state, according to Bach of the consumer group United Policyholders. She said the commissioner’s message to insurers to ask for what they need will likely accelerate that trend. “Buckle your seat belts, California,” she said.