California Was Already in Home-Insurance Crisis Before Los Angeles Infernos

Industry officials warn of widespread economic damage on par with some of biggest fire disasters in recent memory

By Jean Eaglesham and Joe Flint of The WSJ. Excerpts:

"California is the biggest home-insurance market in the U.S. but also one of the toughest for companies to navigate. The state accounted for eight of the 10 costliest U.S. wildfires through last year, after adjusting for inflation, according to Aon.

Despite those risks, its consumer-friendly laws for decades kept home-insurance rates relatively low, compared with the national average, industry data show.

Leading insurers have pulled back from the state, leaving many in the path of the fires with only bare-bones insurance provided by a state-sponsored insurer of last resort—or worse, no insurance at all.

Even before the fires were sparked, millions of homeowners in the Golden State, especially those in the path of the L.A. infernos, faced double-digit insurance-rate increases, nonrenewals or a dearth of any available private coverage.

Leading insurers, including State Farm and Allstate, have stopped selling new home-insurance policies in the state, saying rate increases approved by regulators were insufficient to cover their losses, including from the devastating wildfires of 2017 and 2018."

"Insurers have dropped existing customers in areas seen as high risk for wildfires. State Farm last year announced plans to nonrenew 30,000 property policies in California, including 69% of those in Pacific Palisades.

"California had the nation’s fourth-highest insurance-nonrenewal rate in 2023"

"One area of particular concern for insurers, regulators and consumers alike: the impact of the wildfires on the state’s already-stretched Fair Plan, an insurer of last resort for homeowners rejected by private insurers.

The squeeze on home-insurance availability in the state has pushed tens of thousands more people into the plan, which offers bare bones and typically expensive fire coverage.

That has sharply increased the level of risk Fair Plan insures: The plan’s exposure to potential losses reached $458 billion at the end of September, a 61% increase on the $284 billion of a year earlier, the latest data show."

"Regulators are pushing hard to persuade insurers to reopen to new business in the state.

A more attractive pricing and oversight regime is being promised in return for industry commitments to sell more policies in wildfire-prone areas.

Regulators have in recent months agreed home-insurance rate increases far in excess of the 7% cap that was long the norm in California. Allstate, for example, won approval for an average 34% increase that began taking effect in November.

New rules will allow insurers to base rates on forecasts of future losses from wildfires, rather than—typically lower—historic damages. Premiums will in future also be allowed to take into account the cost of reinsurance, the coverage insurers buy for themselves."