California Residents Issued Dire Warning About Insurance Rate Rises

CABAZON, CA – AUGUST 2, 2023: A firefighter puts water on hot spots behind a burned mobile home which was destroyed in the Almond fire off of Sunrise Avenue south of the 10 freeway on August 2, 2023 in Cabazon, California. There are evacuations in the area.(Gina Ferazzi / Los Angeles Times via Getty Images)

California’s insurance crisis risks worsening as residents covered by the state’s insurer of last resort face sharp rate rises in the near future, the plan’s president said.

Several major insurers have pulled out of the state or refused to renew policies in recent months, forcing many Californians to resort to the FAIR Plan for wildfire coverage.

The FAIR Plan is a privately run insurer of last resort meant to provide coverage to those who can’t get it from the traditional market. These plans typically cost property owners much more money on average and are only intended to provide temporary coverage for catastrophic events.

Now, the problem only appears to be getting worse as Victoria Roach, the president of the FAIR Plan, warned that rates could be about to increase “substantially.”

“Our rates are going to go up, no question about it,” she told the Little Hoover Commission, a state oversight committee, on Thursday. “If we can put net cost of reinsurance in there, if we can use catastrophe modelling just like the voluntary market, our rates are going to go up.”

She said: “In order to bring our rates to the right level, there’s going to be a substantial increase, that’s as much as I can share.”

Newsweek has contacted FAIR Plan for comment outside of normal working hours.

Roach said that the number of consumers the organization insures has more than doubled since 2019, covering around $320 billion of exposure. She said that the Fair Plan is now one of the top five insurers in California, covering just over 350,000 dwelling and commercial policies as of February this year. “This exponential growth that we’re experiencing right now further complicates the situation,” she said.

The number of FAIR Plan policies in force increased from 154,494 in September 2019 to 339,044 in December 2023, with a 22 percent increase in 2023 alone, she revealed in separate documents.

The insurer is required by law to have rates that allow it to remain financially sound, covering the expected cost of claims and losses, along with the organization’s operating expenses. Roach warned that the existing rates are insufficient to meet this requirement.

In 2023, FAIR Plan raised rates by an average of 15.7 percent, but has not yet filed another increase with California’s Department of Insurance, and Roach did not state by how much she expects rates to increase.

Roach said that potential solutions to the problem include permitting FAIR Plan to raise rates in certain areas based on catastrophe risk modelling, as is the case on the voluntary market, looking at the probability of loss due to extreme events including wildfires. She mentioned raising rates based on the cost of reinsurance, or insurance for insurers.

The FAIR Plan is not currently permitted to do this under state legislation, but California Insurance Commissioner Ricardo Lara aims to change this by the end of the year when his Sustainable Insurance Strategy is set to be implemented.

On her long-term plans, Roach said: “We are committed to working with the Department of Insurance on their Sustainable Insurance Strategy, we are committed to working with the legislature, the Governor’s office and other stakeholders to meet the goals…which for us means depopulation.”

She said: “Once the market is set to reengage, then we will work to depopulate and help as much as we can to provide a platform to move customers from the California FAIR Plan back into the voluntary market.”

Across the state, homeowners have complained about skyrocketing premiums and the loss of coverage as large insurance companies abandon policyholders.

Earlier this month, it was revealed that thousands of Californians would lose their home insurance this summer as Tokio Marine America Insurance Co. and Trans Pacific Insurance Co. withdraw from the state, according to filings with the California Department of Insurance. The filings showed that the two companies insured 12,556 homeowner policies across California, with $11.3 million in premiums.

In March, State Farm announced that it would not renew about 30,000 homeowners, rental dwelling and other property insurance policies. It added that it would withdraw from offering commercial apartment policies and would not renew roughly 42,000 of these plans.

The company said that the non-renewals would occur on a rolling basis over the next year, beginning on July 3 for homeowners, rental dwelling, residential community association and business owners policies, and on August 20 for commercial apartment policies. Overall, it said that the non-renewals represent two percent of State Farm’s policy count in California.

American National, a private insurer headquartered in Texas, informed the Department of Insurance in February that it will stop offering homeowner insurance policies by the fall and will begin sending nonrenewal policies to customers as early as August.

The withdrawal is expected to affect tens of thousands of California residents. As of December 2023, American National insured a total of 36,475 homeowner policies in California, worth about $37.9 million in premiums, the San Francisco Chronicle reported.

Meanwhile, Allstate halted writing new homeowners’ policies in California in 2022 citing wildfire risk, the cost of rebuilding and the rising price of reinsurance.

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