Insurance Titans Are Suddenly Fleeing California. Here’s Why

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Jake Smith Contributor
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California’s insurance regulator has blamed the decision of two insurance titans to no longer offer home insurance policies in the state on the effects of climate change, but insurance experts say high building costs and strict regulations that force insurers to keep rates low are the more likely culprit.

Both Allstate and State Farm announced their decision to leave the state within the last month, attributing the reason for the departure to the state’s wildfire coverage costs, reinsurance premiums and high inflation. While the California Department of Insurance, as well as a handful of media outlets, are citing climate change as a main reason for the companies’ departure, experts say the bigger issue lies in regulations and costs.

“The problem is, when you have inflation that’s high and other added costs – such as maybe an increase in wildfire risk – insurance companies can’t get the rate they need for a profitable business,” said Andrew Siffert, senior vice president of the BMS Group, a global insurance broker, to the Daily Caller News Foundation.

“Overall there are a lot of extra costs that are increasing, but the laws and regulations are written to cap large increases in insurance rates. This is to help protect the consumer, but creates pain points as well – as we are seeing with insurance companies pulling out of the state,” Siffert said.

California regulations require insurers to get approval through the state’s Department of Insurance before setting property insurance rates, which pressures insurers to keep rates low and effectively serves to enforce caps on insurance rates.

These regulations also make it incredibly difficult to set accurate rates based on computer models, said Mark Sektnan, vice president for state government regulations at the American Property Casualty Insurance Association, because California requires models used by insurers to be public. Since data modeling companies often want their models to remain private, insurers end up using models from the last 20 years to set rates, Sektnan said to E&E News.

“It’s a little bit like driving your car using the rearview mirror when your windshield is right there in front of you,” Sektnan said.

Because insurers are using old models, they’re getting incomplete data about the current wildfire threat in California, which means risk can’t be properly priced into insurance rates.

Siffert, among others, believes that the two insurance companies were scared off by low profits as a result of high inflation and inflexible regulations, rather than wildfires alone. “It’s a multifaceted problem,” Siffert explained.

State Farm and Allstate have both issued statements on their decision to leave California, declaring that new home insurance policies in the state had become nearly unprofitable. (RELATED: ‘You’d Be Angry Too’: LA Squanders Millions Of Dollars In Housing Vouchers As Homeless Death Rate Soars)

“State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” the company said.

Allstate gave a similar statement to CBS: “The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums.”

Experts also think the real reason the insurance companies left stems from California’s high building costs, which are almost the highest of any state, driven up further by rising inflation rates across the country.

And home insurance rates “have been artificially low for decades,” said Mark Friedlander, spokesman for the Insurance Information Institute. “This means insurers have been writing business there for this very high risk, and they’ve been losing money,” Friedlander said to Axios.

However, California’s insurance regulator has blamed the flight of the insurance companies on climate change.

“The factors driving State Farm’s decision are beyond our control – climate change challenges, higher reinsurance costs affecting the entire insurance industry, and global inflation,” reads the statement from California’s Department of Insurance. “Commissioner Lara continues to proactively outreach to insurance companies to write more business in California so consumers continue to have available coverage options in the face of continued climate change…We are working with the Governor and Legislature to increase our wildfire mitigation efforts, pumping $2.7 billion into wildfire resilience programs over the past three years.”

Nearly 85% of all wildfires in the United States are started by humans, according to the National Park Service. At least 1 in 10 California residents live in an area that has been affected by a wildfire in the last ten years, and California is in the top three states in the country with the highest number of moves into areas recently affected by fire, a study from Bloomberg found. 

Even with continued wildfire disruption, Siffert believes that insurance companies and California’s insurance regulator both have the tools they need to address the problem and protect consumers.

“Over the last several years, particularly with wildfire risk, a ‘dime a dozen’ analytics companies have developed meaningful solutions to help insurance companies manage these risks,” said Siffert. “These tools didn’t exist a decade ago. Wildfire exposure management is not that challenging.”

In light of regulations enforcing discounts and low rates, amidst already high inflation, insurers are choosing to cancel or decline renewals for policies in high wildfire-risk areas, as evidenced by Bloomberg data on insurer cancellations, which jumped from 165,000 in 2018 to 235,000 in 2019, and then 241,000 in 2021.

Allstate and State Farm have not yet provided a timeline for when they plan to resume business in California.

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