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Why home insurance prices are rising in California

On Behalf of | Oct 17, 2023 | Blog, Insurance Law

Recently four of California’s largest insurers curtailed new home insurance applications, sending shockwaves through the state.

As of late 2022, some companies ceased accepting applications, while while others reduced policy-writing efforts or are working to implement stricter wildfire safety standards for new policies. This abrupt shift has destabilized the insurance market.

Policy limitations

The repercussions of these policy limitations are far-reaching. With over half of California’s residents estimated to be homeowners, many are struggling to find affordable home insurance.

Historically, California’s high wildfire risk has been a concern. However, the increase in severity and construction costs have pushed insurance providers to reassess doing business in the state.

The drivers

Several key factors have driven insurers to slow down or leave the California home insurance market:

  • Proposition 103, implemented in the 80s, mandates that insurers seek state approval for rate increases exceeding 7 percent. This process protects policyholders, but delays rate adjustments. Consequently, insurers become unable to cover rising costs.
  • Climate change has exacerbated wildfires, putting over two million homes at high risk. The length of wildfire season has also extended dramatically.
  • Construction material prices surged nearly 40 percent in just four years. This added significant financial pressure on insurers’ ability to stay solvent.
  • Reinsurance, a vital safety net for insurers, is becoming increasingly expensive. This, along with growing climate risks, diminish the insurers’ financial flexibility.

These factors complicate the situation for insurance agencies and homeowners alike.

Future implications

Efforts are being made to address the crisis. There are discussions about modernizing Proposition 103. Lawmakers hope to incorporate wildfire modeling into rate calculations. This could provide insurers with a more flexible framework.

Governor Gavin Newsom’s executive order, issued in September, aims to improve the efficiency of the rate approval process. This offers a glimmer of hope for homeowners and insurers alike.

The current upheaval in California’s home insurance market calls for urgent reforms. As the state struggles with climate change challenges, lawmakers, insurers and homeowners must collaborate to find sustainable solutions.