A garage is engulfed in flames during the Thompson Fire in Oroville, California on July 2, 2024.
As California faces a new wildfire season, the impact on the state’s insurance market is becoming more severe.
The reasons are many and complex: increased wildfires and extreme weather events, inflation-driven construction costs, high capital costs, abuses of the legal system and long-standing regulatory obstacles.
Homeowners are understandably tired of seeing their premiums increase or, even worse, their policies canceled after paying premiums for years, while insurance companies struggle to collect enough premiums to pay claims and service customers while maintaining a sustainable business.
Home insurance in California has remained low for a long time. Since 2013, California home insurers have spent an average of $1.08 on every premium dollar they collected. Specifically, CSAA Insurance Group had to pay $1.14 for every premium dollar it received in 2023 and dip into its reserves to pay claims to customers.
Most insurers continue to pay out more than they make, creating an unsustainable market. Insurers cannot continue to do business in the state as long as they are losing money. If insurers continue to leave the state, everyone loses.
And it’s a domino effect. Unavailability of home insurance negatively impacts mortgage availability, which in turn impacts real estate, the banking industry, the construction industry, etc. Because California is the fifth largest economy in the world, the impacts will ripple across the country and even the world.
How did we get here?
The increase in extreme weather events due to climate change cannot be ignored. Other factors, including a history of poor forest management, aging public infrastructure, abuse of the legal system, and building in wildfire-prone areas, also greatly increase this risk.
The regulatory environment is tough. California is one of the few states that requires a lengthy approval process for rate changes, making the market less agile. Additionally, California regulators don’t allow the use of climate change models that predict the future to set rates, instead relying on historical data that is increasingly outdated.
But Insurance Commissioner Ricardo Lara has proposed a solution that would allow insurers to use predictive disaster models to inform rate changes, and Gov. Gavin Newsom has introduced legislation to expedite the process for applying for rate changes.
These are welcome developments, but to ensure Californians can find and afford home insurance, it is essential that all stakeholders work together because everyone must play a role in the solution. In addition to regulatory reform, we must also focus on wildfire mitigation. We must develop responsible approaches to development, including properly managing our forests, upgrading our public infrastructure, and building fire-resistant communities.
It is also essential that homeowners take meaningful steps to make their homes more durable, which can help them qualify for discounts to offset increased premiums. The Insurance Institute for Business & Home Safety offers a Wildfire Prepared Homes program that provides rigorous standards based on scientific research. Simple steps like installing a five-foot fireproof buffer around your home, installing screens on vents, and maintaining decks and yards can make your home safer.
I know this is a difficult process for all involved, but we are all on the same team at the end of the day. We all want fair rates for consumers and a stable home insurance market. It is in everyone’s best interest to work together to restore a thriving insurance market in this great place we call home.
Mike Zukerman is president and CEO of CSAA Insurance Group, which provides insurance to AAA members.
