California’s largest property and casualty insurer, State Farm, announced in late May that they would be halting new policies from being issued across home, personal, and business sectors. The announcement stems from a long string of wildfires that have left many insurers concerned about proper risk evaluation and indemnification. The announcement has left other vulnerable states questioning if similar action will spread to other regions, leaving many feeling unstable in their risk management plans. Given the magnitude of State Farms' announcement, citizens and political figures are reconsidering the state of the US insurance market and what it could mean for their future.
Key Factors Impacting State Farm’s Withdrawal From California
State Farm isn’t the first major provider to halt new policies in California amidst its rising climate concerns. Allstate also recently made the decision to pause the issuance of new policies, citing similar concerns to State Farm.
Both providers have stated that the main factors in their decision were worsening climate risks and inflated repair costs. California is no stranger to wildfires, and the risk has always been present. However, in recent years they have grown in frequency, severity, and unpredictability. The 2020 wildfire season burned more than 4.3 million acres, with the ensuing years maintaining high numbers. On average, 3-4 thousand buildings have been destroyed each year, with record years of 11,000 buildings. This has cost insurance companies billions of dollars in repairs, leaving them questioning their place in state markets.
The biggest challenge in environmental risks is accurately predicting the severity of impact, which major insurers now feel they are unable to do. Decades ago, the traditional wildfire season followed trends that could be managed and maintained, but with the global climate crisis, these seasons are starting earlier, lasting longer, and causing increased damage.
To add fuel to the fire, national inflation has dramatically increased construction costs, including labor and materials. State Farm and other providers that have withdrawn from the state can no longer accept the risk of unpredictable damage with high-cost repairs, stating the cost of premiums would be far too high for people to willingly pay. For pre-existing policies, State Farm has filed a request to the California Department of Insurance to increase premiums by an average of 28%.
Outdated Risk Assessments Further Complicate Policy Issuance
In addition to the obvious risks that major insurance providers face in California, many claim that the current pricing model does not accurately reflect the risk providers must take on. Insurance regulatory systems that have been in place since the 80s won’t allow for modern computing systems to be used in the pricing process, which would likely provide more accurate results. The pricing model works on averages, rather than increasing risk, and can’t account for the costs that climate change has incurred. State Farm and other providers have asked to introduce these sophisticated computing systems, but have been rejected. This was likely another key influence of State Farms' decisions.
Will Other States Experience Insurance Withdrawal?
There's no way to fully predict whether or not insurance providers will withdraw from other states, but it is a possibility. Florida has experienced a number of providers withdrawing, leaving many relying on state and federal-funded programs for coverage. Florida and other states, like Louisiana, are experiencing parallel struggles to California with unpredictable, damaging weather events. Those who already have insurance should not be concerned, for in most cases pre-existing coverage will continue, and companies aren’t issuing non-renewals. For other high-risk states, trends in the economy and climate can help predict the likelihood of insurance loss.
It’s also hopeful to understand past patterns of withdrawal. State Farm pulled out of Florida in the late 2000s after severe weather events, but eventually began writing new business again in 2014. For California and Florida residents, this could mean that major insurers will re-enter the market when risks are more manageable, or climate events slow down.
Will California’s Home Prices Increase?
While California does not require home insurance, most major mortgage lenders do. In addition, most buyers want protection against the many threats they face across the state. It's currently unclear whether or not prices will increase for personal and commercial property. As smaller insurance providers will be in higher demand after State Farm and other major insurers have left, this could mean a steep premium increase. There has been a large increase in all-cash home purchases, as buyers struggle to get loans. Politicians and legislative representatives are working to protect Californians against both loss of insurance and potential homelessness. While these trends continue, individuals and businesses may consider renting over buying until the market is stabilized.
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