California is facing significant challenges in its homeowners insurance market, as outlined in a recent Issues Brief by the Insurance Information Institute (Triple-I). The report addresses the factors contributing to the state's risk crisis and what is needed for market stabilization.
The report identifies several key issues impacting the market, including Proposition 103, which has been in effect for over 30 years. This measure does not account for the evolving climate risks affecting the insurance market. Additionally, the industry has faced a lack of profitability in underwriting over the past decade, coupled with increasing costs for building and replacements, as well as wildfire damage exacerbated by construction in the wildland-urban interface areas.
Triple-I CEO Sean Kevelighan stated, “For years, insurers have sounded the alarm. They have warned policymakers about the urgent need to modernize regulations so the system can function in the face of increasing climate risks. But change has been slow and the consequences are now clear.”
Kevelighan acknowledged recent reforms, including the implementation of the Sustainable Insurance Strategy set to begin in 2025, adding, “Recent reforms, including the long-awaited Sustainable Insurance Strategy, are a step in the right direction. With implementation beginning in 2025, the new strategy poses a potential to fix the troubles of the past and rebuild with a more robust, sustainable and insurable market after what may be the worst wildfires in California’s history.”
The report highlights unintended consequences from the state regulators’ application of Proposition 103, particularly related to insurance availability and affordability. The interpretation of this proposition has required insurers to base prices only on historical data, preventing them from pricing catastrophe risk prospectively.
Restrictions on factoring reinsurance costs into pricing further complicate accurate underwriting and pricing. Without adequate premium reflection of reinsurance costs in high-risk areas, insurers are left to cover these costs from policyholder surplus or limit their market presence in the state.
As insurers cautiously increase their coverage of properties in California, the California FAIR Plan is expected to revert to its function as the insurer of last resort, reducing its market share to a more manageable size.