State Farm made national headlines last week when it said it would stop selling new home insurance policies in California. As California鈥檚 largest single provider of bundle home insurance policies 鈥� the company had 鈥� the news struck some as the beginning of a fresh emergency, with insurers abandoning a fire and flood ravaged state.
But the retraction of California鈥檚 biggest home coverage provider is only the latest development in a wildfire-fueled crisis that has smoldered beneath the surface of the state鈥檚 insurance market for years.
After the disastrous fires of 2017 and 2018, the number of Californians who were told by their insurer that their policy wouldn鈥檛 be renewed to almost 235,000 households. The two severe wildfire years wiped out decades of industry profits.
, American International Group let thousands of customers know their home insurance policies would not be renewed, and Chubb, a high-end insurer, said it would continue to non-renew some of its customers.
And late last year, thousands of condo owners also found themselves among the uninsurable as the state鈥檚 regulated insurers in droves across San Diego County鈥檚 wildfire-prone shrubland.
鈥淪tate Farm sort of publicly said what they were doing, but I think for the last few years, we鈥檝e all seen insurers restricting and pulling back their business in California,鈥� said Seren Taylor, vice president of Personal Insurance Federation of California, an industry trade group that counts State Farm as a member.
State officials emphasized that State Farm鈥檚 current policyholders will not lose coverage.
鈥淚t鈥檚 important to note that current customers will not lose their insurance,鈥� wrote Michael Soller, deputy insurance commissioner at California鈥檚 Insurance department, in an email to CalMatters. This decision will affect people who are shopping for home insurance, in that they will have one fewer provider to choose from.
State Farm in a press release blamed high construction costs that make it extra expensive to rebuild after a home is destroyed in California, growing natural disaster risk 鈥� particularly from wildfires 鈥� and 鈥渁 challenging reinsurance market.鈥�
Insurance companies frequently purchase their own insurance 鈥� known as 鈥渞einsurance鈥� 鈥� to minimize the risk of getting hit with millions of dollars of costs all at once, as might happen during a catastrophic wildfire or a major hurricane.
in recent years in disaster-prone states like fire-ravaged California and storm battered Florida, Louisiana and Texas. California law prohibits insurers from passing along the cost of reinsurance to customers. Industry groups are lobbying to change that.
鈥淭his is tough for legislators,鈥� said John Norwood, a lobbyist for independent insurance brokers. 鈥淏ecause the solution is prices going up.鈥�
How California regulates home insurance
High rebuild costs, increasingly severe wildfires and high prices of reinsurance are all risks that insurance companies might be willing to take on.
But only for the right price.
Increases in insurance premiums in California are approved or denied by the state鈥檚 elected insurance commissioner, Ricardo Lara. Industry groups have long argued that Lara鈥檚 office has not allowed providers to set prices commensurate with the cost of doing business in fire-prone California.
鈥淲e have very inexpensive home insurance in California,鈥� compared to other states, said Michael Wara, a lawyer and climate scholar at Stanford Law School. 鈥淏ut the thing is, five years ago, we realized 鈥榦h yeah, actually in California you can burn down 50,000 houses overnight.鈥欌��
Five years ago, we realized 鈥榦h yeah, actually in California you can burn down 50,000 houses overnight.鈥�MICHAEL WARA OF STANFORD LAW SCHOOL
The consequences of a continued drip-drip decline of insurers from California could be far more costly in the long run, warns Dan Dunmoyer, president of the California Building Industry.
As an illustration, he points to California history. After the 1994 Northridge Earthquake dealt roughly $42 billion in damage across Southern California, in California entirely.
Because home insurance is a basic requirement for most home loans, the exodus of insurers caused the state real estate industry to grind to a halt, Dunmoyer recalled.
鈥淭he whole world stopped,鈥� he said. 鈥淭hat鈥檚 the worst case scenario. We鈥檙e not quite there yet.鈥�
Can California block State Farm鈥檚 retreat?
There are various ideas circulating about what the state can do to keep State Farm in the market, some more drastic than others.
The advocacy group Consumer Watchdog on Tuesday argued has the power to order State Farm to reverse its decision. That authority, the group said, comes from Proposition 103, a voter-backed initiative passed in 1988 that gave the department the power to approve or deny premium increases.
Wara, from Stanford Law, said the idea was a 鈥渘on-constructive approach to this problem.鈥�
He said the entire insurance industry likely would sue the state if the California insurance department were to assert that authority, and the lawsuit would take several years to resolve. He said he finds it 鈥渉ard to believe鈥� that a court would force the industry to keep issuing new insurance policies during the years the case was in court.
鈥淭hat is a recipe for the entire market falling apart, potentially overnight,鈥� Wara said. 鈥淭hat would undo not just the insurance market, but everybody that has a home mortgage in California, everybody that wants to buy or sell a home in California.鈥�
Last resort for California homeowners
Another sword hanging over the state鈥檚 insurance industry: The possible demise of the FAIR Plan, the limited insurance plan Californians can turn to when no standard private company will cover them. It鈥檚 funded by levies on private insurance companies that do business in the state.
鈥淎 lot of other insurers have stopped selling,鈥� said Amy Bach, executive director of United Policyholders, a consumer group. 鈥淚f you talk to an agent or broker today, they鈥檙e going to tell you it can be pretty hard to find insurance鈥� outside of the FAIR plan, Bach said.
As the risk of catastrophic wildfire ramps up across California, that risk falls disproportionately on the FAIR Plan. And if an especially severe fire season renders the plan bankrupt, the tab will fall on those insurers still doing business in the state in proportion to their share of the market, said Wara, from Stanford.
State Farm, as the largest insurer, would have to chip in the most. That鈥檚 one reason the company might have decided to not issue new policies anywhere in California rather than just limiting new policies to places with low wildfire risk. 鈥淪tate Farm is saying 鈥榳e want less of that,鈥欌�� Wara said.
That problem isn鈥檛 unique to California.
In Texas, the increasing severity of Gulf Coast hurricanes has driven tens of thousands of homeowners onto that state鈥檚 chartered backstop insurer leading to .
In Florida, the crisis may have already arrived. This week, Florida鈥檚 insurance commissioner authorized a to that state鈥檚 insurer of last resort 鈥� now the single largest insurer 鈥� in preparation for the coming storm season.
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