The fires that have ravaged large swaths of homes in Los Angeles are likely to significantly alter the California homeowner’s insurance market. Policyholders may need to brace themselves for surging premiums, policy non-renewals, and uncertainty.
These wildfires will result in record payouts by insurers. Preliminary estimates on Jan. 14 were that the fires had so far caused $20 billion in insured losses, a number that’s likely to rise if they continue burning.
So many insurers have in recent years already left the state or drastically curtailed the number of policies they write due to the wildfire threat, and the scale of these fires could push more of them to do the same.
Besides the hit to insurers, the L.A. fires are likely to have severe consequences for the state’s market of last resort for home insurance, the California FAIR Plan, which said it may see more than $3 billion worth of claims from the fires.
The FAIR Plan does not have the resources to cover damages above $2.3 billion at this stage. If its ultimate claims exceed that, all homeowners’ insurers in the state will be surcharged — and likely will pass those fees on to policyholders.
You may have noticed that your homeowner’s insurance premium has risen in the last few years. The following explains why you should expect more rate hikes.
The state of the market
The homeowner’s insurance market in California is in a state of crisis. Dozens of insurers have pulled out of the state, and the ones who have opted to stay have dropped policies in high-risk areas or have gotten more selective about the properties they are willing to insure.
Mainstays like State Farm, Farmers, and Allstate have stopped taking on new customers and have been shedding others they deem too risky. State Farm has dropped more than 100,000 policyholders in the last year alone.
Some common factors that can prompt a carrier to refuse coverage are the age of the roof (10 years for composite) or the age of the home (some insurers won’t insure a home older than 25 years).
Homeowners who have recently filed claims are often dropped as well by their insurers and find it hard to secure new coverage.
Besides the wildfire risk, the cost of repairs and rebuilding has skyrocketed in the last few years, which has driven rates higher.
The bottom line: The market was already turbulent before the L.A. fires.
Homeowner’s rates
The size of rate increases over the past few years has been tempered by laws that restrict the rate hikes insurers can request with the Department of Insurance.
That’s depressed insurance rates for decades, and they have not kept pace with rising costs. California has the 17th lowest homeowners’ insurance premiums in the country, an average of $1,381 — $800 a year less than the national average, according to Bankrate.com.
After the L.A. fires’ insured losses are tallied, California may soon join the ranks of the most expensive homeowner’s insurance states in the nation: Florida (annual average premiums of $5,301) and Nebraska ($5,376).
Florida has seen severe destruction from an increasing hurricane threat, and tornadoes and convective storms have increasingly torn through Nebraska in the last decade, causing untold damage.
Risk to the FAIR Plan
As insurers leave the Golden State or refuse to cover homes in areas like the Pacific Palisades, Big Bear, Truckee, and other wildfire-prone areas, more homeowners have been forced to get coverage with the FAIR Plan, which has put it in precarious shape.
As of Sept. 2024 (prior fiscal year-end), the FAIR Plan’s total exposure was $458 billion, a 61.3% increase from Sept. 2023.
Those sums are astounding, considering that the FAIR Plan’s annual written premium is $1.26 billion. Also, the plan had just $200 million in reserves as of Sept. 30 last year, and $2.5 billion in reinsurance (which is insurance for insurance companies).
Current estimates are that the FAIR Plan will likely face more than $3 billion in claims from the fires. Under state law, if the L.A. wildfires exceed its reserves and reinsurance, the plan can charge all private insurers in the state based on their portion of the insurance market for the first $1 billion above what the FAIR Plan can pay — and they can collect half of that from their policyholders.
For any funds needed above $1 billion, the FAIR Plan can seek approval to assess all policyholders in the state.
Any of those surcharges would be on top of the premiums policyholders pay.
What you can do
If you are dropped by your insurer or your rates are increased substantially, we can look for other coverage. There are still a few insurers willing to write business in California.
If we can’t find a carrier licensed in California, we can check with the “non-admitted” market, which includes insurers that are not licensed in the state but are still backed by stable companies like Berkshire Hathaway and Lloyd’s of London.
Their policies may differ slightly, like limits on certain types of claims or higher deductibles for some events.
You also should take all steps necessary to make your home “insurable.” For example:
- If you have an old roof that needs replacing, replace it.
- If you have tree branches hanging over your roof, cut them back.
- Install devices in your home that will detect leaks and shut off your water if there is a leak. Leaks are a major cause of claims.
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