A large umbrella protecting a home blows away in the wind.
Illustration by Lanette Behiry/Real Estate News

A hazy future for homeowners insurance in California 

Two of the state's top providers will no longer accept new applications, setting a grim precedent and adding another challenge for buyers.

June 9, 2023
4 minutes

Key points:

  • State Farm and Allstate recently announced their decision to stop offering new policies to California homeowners.
  • The increasing frequency of wildfires in the state, coupled with the high cost of homes, is a risky combination for insurers.
  • Risk reduction measures are needed to help protect homes and communities from inevitable future disasters.

Summers tainted by thick clouds of wildfire smoke are nothing new for West Coasters. Even New Yorkers are now experiencing the phenomenon as a result of fires raging across eastern Canada, bringing the reality of climate change and natural disasters close to home for more Americans.

The West Coast wildfire situation has become so dire that two major home insurers recently announced their decisions to wind down their exposure in California. Both State Farm and Allstate, who had been the No 1. and No. 4 insurance providers in California, will no longer issue new homeowner policies in the state, adding another challenge for prospective buyers in a state already plagued by an affordable housing crisis

It's a situation that many Florida homeowners have already experienced in the last couple of years as numerous insurance companies have either scaled back or completely exited the Sunshine State in response to the high cost of covering hurricane and flood-related property damage.

And climate-related disasters are only expected to become more frequent and more devastating. According to the Harvard Joint Center for Housing Studies, over 14.5 million homes in 2021 were impacted by various natural disasters, such as hurricanes, hail and wildfires, which caused an estimated $57 billion in property damage — and insurers are taking note. 

Why major insurers are leaving California

Allstate, State Farm and potentially others yet to come are turning away from California because of the risk — and potential cost — associated with insuring properties in regions increasingly prone to wildfires. That's especially true in a state where many high-risk areas, like Los Angeles, are also major population centers, Tom Larsen, a senior director with CoreLogic who studies wildfire risk and natural disasters, told Real Estate News.

"California is approximately 10% of the U.S. homeowners insurance market, so their decision to step back on 10% of their business is a really big deal," he said. "Numbers-wise, there's almost two million homes that are in the highest-risk areas in California and another two million that are a mid-level risk."

Roughly a quarter of all homes in California are at some level of risk from wildfires, Larsen added, which could be catastrophic to insurers in the case of a major disaster. 

"An insurance policy is a promise to rebuild your home fully back to the contract value," he said. "Insurers are really worried about whether they will go out of business next year."

When a destructive tornado plows through the Midwest, it's not uncommon for a smaller, local home insurance company to fold, Larsen said. But after the powerful category 5 Hurricane Andrew hit the Southeast in the summer of 1992, even many major insurance companies became insolvent. That fear of insolvency is now causing insurers to exit California.  

High home prices in at-risk areas a further deterrent for insurers

There are a number of issues working against California. Not only do a high percentage of properties face some level of disaster risk, but homes in many high-risk areas — such as greater Los Angeles, the San Francisco Bay Area and the Lake Tahoe region — are often priced above $1 million and would thus be very expensive to rebuild. And then there's the state's widely varying topography which could further complicate construction.

Insuring so many communities where home values are well above the national average no longer makes business sense for some major carriers, particularly as wildfires have become so frequent. 

Making homes and communities safer against wildfires

Larsen warns that wildfires are not going away. However, there are opportunities to improve the construction and safety of future homes and communities as a whole. A real-life case study is taking place in Paradise, California, where over 10,000 homes were destroyed by a wildfire in 2018 but are currently being rebuilt. 

"The challenge with Paradise is that an entire town burned down in eight hours," Larsen said. "How can you delay the speed of that fire going across that community so that you can get firefighting resources in there?"

When insurers are considering coverage options, they are looking at risk models that take entire communities into consideration.

"In risk reduction for wildfire, it's what can we do to reduce the risk not just on your property, but a half-mile away," Larsen said. "The risk of your home is highly related to the risk model — it makes it a little bit more challenging to solve, but it's one thing that can be solved."

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