Thousands of Californians have lost their home insurance coverage in recent years, a topic host Siyamak Khorrami recently featured on Epoch TV’s “California Insider.”
To help understand the complex issue, Khorrami invited an insurance broker with 40 years in the business as well as a couple who have recently lost two homes to California wildfires, the more recent of which was uninsured.
Additionally two California lawmakers give detail solutions and their take on how to turn the problem around.
Caps on Rate Increases
The issue began in 1988, when California residents approved Proposition 103, which capped rate increases for auto insurance—and eventually for homeowners’ policies—and established the state’s insurance commissioner.
Since then, the commission has approved rate increases for residential and commercial property based on historical data and capped them at 7 percent. If a carrier requested more, the approval process was opened up to challenges by residents and watchdog groups. The result, experts say, is that increases, if approved at all, could take up to two years.
Such kept homeowners’ rates in California artificially low, while other costs for insurers were on the rise.
A Freeze on Rate Increases
Insurance broker Harry Crusberg said the crisis of so many insurance carriers canceling policies or leaving the state began during the COVID pandemic, when the state’s insurance commissioner froze all rate increases, resulted in carriers losing money.
“Carriers started losing $1.15 to $1.25 per dollar they took in,” Crusberg said.
“When you talk about multi-millions of dollars and billions of dollars, these losses just mounted substantially for carriers.”
As a result, carriers large and small started issuing nonrenewals or dropping out of the California market all together.
“You can only lose money for so long,” he said.
Suddenly, many homeowners lost their insurance and had only two options: going with one of the so-called non-admitted carriers—which are not regulated or guaranteed by the state—or getting insurance through California’s Fair Plan, established more than 50 years ago as a last-ditch emergency resort.
While pricing can vary, both are usually much more expensive than traditional insurance, as much as 10 times higher in some cases, experts say.
The Fair Plan is not funded by the government, as some believe, but instead by the state’s regulated insurance carriers, who pay proportionally into it. According to Crusberg, today they have accumulated about $400 billion in risk for their contributions to the plan.
With a freeze on rate increases, contributions to the Fair Plan, the need to have their own costly insurance—called “reinsurance”—and more claims for wildfire and disasters, the industry became destabilized, Crusberg said.
“They [had] to back off. They just [didn’t have] the capital to sustain that,” he said.
Crusberg said the confluence of issues is rare.
“I’ve been in the business for a little over 40 years … and we’ve never been faced with such a situation,” he said.
A New Insurance Plan
According to Crusberg and others, there is now “light at the end of the tunnel,” thanks to recent changes by the state’s insurance commission that will allow for wildfire and risk-based premiums determined by recent events. Also, under the commissioner’s recent plan, an insurance carrier’s requested rate increase must be decided within 90 days.
“Once that comes in, the carriers [will start] to get a breath of fresh air,” he said.
“If we can do this and get our right rates, we’re going to be able to help solve this problem by coming back into the marketplace.”
But with the new plan—called the “sustainable insurance model”—not yet in place, some have chosen a third option: to forgo home insurance altogether.
One Couple’s Losses
Such is the case of Michael and Christy Daneau, who lost a home in the 2018 Camp Fire in Northern California’s Butte County, and then, most recently, another in July’s Park Fire, which originated in Chico, about a 20 minute drive west from their first home.
The couple said they had insurance before the first fire for $86 a month. But after they moved to the Chico area, their first year of insurance through the Fair Plan—the only insurer that would carry them—was $7,000—roughly $580 a month—payable in one lump sum.
They also had to purchase additional coverage for their new home, as the Fair Plan offers only fire insurance.
They said the price increased to $10,000 in the second year, again due in one payment, and finally $12,000 in the third year, which they said they could no longer afford.
Ultimately, the couple said, they had to go without, an especially hard decision as they had already lost one home to fire. They never expected they would be hit twice.
The price was “too unobtainable for us,” Daneau said.
Now after the Park Fire, he said they have little left.
“We went from being homeowners, owning our house outright, to now having literally just some clothes and a few personal possessions,” Daneau said.
Other Solutions
California state Sen. Bill Dodd, who represents the state’s Third Senate District including Napa, Contra Costa and Sacramento counties, told Khorrami their choice to not have insurance was not a good one.
“All you can do is hope and pray, and hope and prayers are not a great strategy,” he said.
He said he has faith in the commissioner’s new insurance strategy since it will allow insurers to increase rates using climate and catastrophic models and will allow them to factor in their cost for reinsurance.
Not being able to do so previously, he said, was a “disservice to the ratepayers of the state of California.”
Because insurers’ rate increases have been capped at 7 percent for so long, he said, allowing them to catch up with increases between 25 percent and 40 percent will ultimately stop so many carriers leaving the state.
“Thirty-five percent rate increases across the board are a heck of a lot better than cancellation of policies or rates that are three to four to 10 times more than [people] are paying now,” Dodd said.
“That is at least affordable.
“It’s doable and ultimately creates a more stable insurance market and perhaps competition over time could bring those prices down.”
He said the number of policies written for the Fair Plan more than doubled over the last year, and that is “a critical problem.”
“It’s got way too many clients to really withstand the type of risk that it is,” he said.
He said as things change, property owners currently on the plan or those using non-admitted providers will decrease as more typical carriers return to the market and pick up those lost customers.
Additionally, Sen. Dave Cortese, who represents the state’s 15th Senate District, which encompasses Santa Clara County, discussed the possibility of what’s known as “partial” insurance, where a carrier, for example, would insure only a portion of a property, which he said needed more study.
He added that there may be bills introduced in the next legislative session—beginning in January—that, if passed, would make the insurance process better for homeowners, especially in terms of fire risk, like being rewarded for hardening their property and creating defensible space around their homes.
Then, he said, the homeowners could go back to the insurer and say, “‘We’ve reduced your risk. Can you underwrite insurance on those now?’” he said.
He also said the Legislature needs to consider a state-funded backup financial safety net for the Fair Plan. As it is today, if there were a couple of major losses, it could become insolvent.
By doing so, he said, “Fair Plan won’t be able to tell [people who have catastrophic losses], ‘Sorry, we ran out of money,’” Cortese said.
He closed by saying both chambers of the Legislature have created their own insurance working groups to come up with solutions to get the insurance market to “shift back naturally to where it should be.”
“The Legislature is taking this issue very, very seriously,” he said. “We know that people who have invested their entire lives or life savings in their homes and their properties can’t be left at risk without insurance coverage.”
Finding the balance between protecting property owners and ensuring insurance companies are profitable enough to do business in the state is the challenge.
“That’s the balance and that’s the trick,” Cortese said. “That’s what we’re trying to accomplish.”
