California's insurance is in crisis. The solution will cost homeowners a ton

https://www.cnn.com/2025/01/09/business/california-wildfires-homeowners-
insurance/index.html

New York CNN — Lynne Levin-Guzman stood in the front yard of her 90-year-
old parents’ home in Los Angeles County, California, trying to protect it 
with a garden hose — because their insurance company no longer would.

“I know I’m not supposed to be here, but this is my parents’ home and they 
just lost — they got canceled from their fire insurance. So they’re 
dealing with this,” she told CNN affiliate KABC. “They’ve lived in this 
house for 75 years and they’ve had the same insurance and these insurance 
people decided to cancel their fire insurance.”

“And they wonder why people leave California,” she added.

Levin-Guzman and her parents’ experience is increasingly common. Between 
2020 and 2022, insurance companies declined to renew 2.8 million homeowner 
policies in the state, according to the most recent data from the 
California Department of Insurance. That includes 531,000 in Los Angeles 
County, where fires are currently raging.

Some of those policies were not renewed by homeowners, according to an 
insurance industry trade group. But most of those policies were canceled 
by the insurers.

Firefighters battle the Palisades Fire as it burns a structure in the 
Pacific Palisades neighborhood of Los Angeles, Wednesday, Jan. 8, 2025. 
(AP Photo/Etienne Laurent)

The issue has continued to build over the past several years, State 
Insurance Commissioner Ricardo Lara and consumer groups say. Insurers in 
California have been refusing to write new policies in areas they consider 
to be at high risk for wildfires, which is a large percentage of the 
state.

The rising threat of wildfires, and insurance companies pulling back on 
offering coverage in the large swaths of California at risk for these 
devastating disasters, has become a crisis for homeowners throughout the 
state. And while the state has recently taken steps to address the issue, 
those new rules are sparking their own criticism because of the increased 
costs to homeowners that could accompany them.

The problem of canceled policies has forced some homeowners to go without 
fire insurance or to use a program set up by the state — but without 
taxpayer support — called the California FAIR plan. Those policies have 
higher premiums than traditional private insurance and less coverage, 
often requiring homeowners to buy additional “wrap around” coverage at an 
even higher cost.

Although FAIR is supposed to be a last-resort insurance provider, demand 
for its policies has skyrocketed. Its exposure for dwellings as of 
September was up 61% to $458 billion from just a year earlier, and triple 
where it stood only four years ago. Its exposure for commercial policies 
has risen even faster, nearly doubling to $26.6 billion as of September, 
and up 464% in the last four years.

California FAIR tried to assure worried homeowners that it would be able 
to handle the claims that this week’s massive fires will produce.

“The FAIR Plan, which is primarily a catastrophe insurer, is prepared for 
this and is actively serving customers who have made claims,” it said in a 
statement Wednesday. “The FAIR Plan has payment mechanisms in place, 
including reinsurance, to ensure all covered claims are paid.”

No matter the financial condition of FAIR after these fires, homeowners 
will almost certainly foot the bill in the form of higher premiums. One 
way or another, it will probably become even more expensive to live in 
California.

New insurance regulations just announced
To give California homeowners in high-risk areas an alternative to 
California FAIR, the California Department of Insurance just announced new 
regulations two weeks ago designed to get private insurers to start 
writing policies in fire-prone parts of the state. The policy is designed 
to get private insurers to take back much of the coverage now handled by 
California FAIR.

The rules will require that insurers need to write policies in fire-prone 
areas equal to at least 85% of their market share throughout the state.

But the policy also gives insurers one thing they’ve been seeking for 
years: the ability to factor in the cost of reinsurance policies, which 
are policies they buy from other firms to spread their risk, as part of 
their rate calculations. California has been the only state that didn’t 
allow the cost of reinsurance to be part of the rate calculations. 
Reinsurance has been rising due to both the risks posed by climate change 
and the increasing cost of claims due to inflation raising the price of 
labor, lumber and other raw materials.

So the rates that private insurers charge is very likely to increase as a 
result of this new policy.

“We are being realistic about the risks in California,” Lara told CNN 
Wednesday. “We can never get to affordability unless we address the 
availability.”

But Lara’s new policy has been harshly criticized by Consumer Watchdog, a 
nonprofit, nonpartisan Consumer Advocacy Group that focuses on the 
insurance market in California. It estimates that insurance rates could 
rise 40% to 50% as a result of the change, an estimate that Lara disputes. 
It points to rate hikes of 25% or more approved by the state for many of 
the major national insurers, such as State Farm, Farmers and Allstate in 
just the last 13 months.

And the group says there are too many problems with the new rule that will 
allow insurers to still avoid residents in fire-prone areas who need the 
insurance the most.

“This new policy is guaranteeing higher rates but not necessarily access 
to coverage,” said Carmen Balber, executive director of Consumer Watchdog. 
“The commissioner has granted the insurance industry what it wants. There 
are so many loopholes and lack of teeth in the rule that homeowners won’t 
see expanded coverage for a very long time, if at all.”

Rising costs
The Insurance Information Institute, an insurance industry trade group, 
says it supports the new rules, arguing it is the best solution for 
allowing its members to insure the fire-prone part of the market that 
needs fire insurance the most. While the industry’s own stats show that it 
has been profitable in California in recent years, it said massive losses 
in 2017 and 2018 caused by the wildfires more than wiped out a decade 
worth of profit. And it says their costs continue to rise, requiring the 
increase in insurance premiums.

“We have seen the cost of reinsurance has been going up due to climate 
risk and also inflation,” said Janet Ruiz, spokesperson for III. 
California is the only state that hasn’t allowed the cost of reinsurance 
to be factored in to rates, she said.

Lara said as some of the homeowners who have been forced onto FAIR plan 
are able to find private insurance once again, their premiums could fall, 
even if those insurers’ rates are higher than they used to be because the 
cost of reinsurance is now calculated into their rate.

“This will set premiums fairly for consumers,” he said. “The cost for 
insurance has skyrocketed. Inflation is even more of a factor than climate 
change. You have to take in mind.”

But Consumer Watchdog said that the industry has been profitable in 
California, even without these rules and should be required to write 
policies for those who have lost coverage without the change in rate 
calculations.

Despite what insurers claim, she said, “the insurance industry is not on 
the verge of catastrophe in California.”


-- 
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