Ensuring we’re sure we can get insurance
The insurance crisis grinds on.
Last June, Gov. Gavin Newsom’s office said that despite rising rates due to climate change, California’s home insurance rates “have been below the national average and significantly less than some other states,” citing yearly costs for a $300,000 home of $1,405 in California, $3,851 in Texas, $4,419 in Florida, and $2,601 nationally. That difference in prices alarmed some when the governor threw his weight behind an effort to speed up the processes for insurance companies to receive rate increases.
The problem is both complex and simple. Insurance companies say they’re not allowed to charge for their coverage what they deem necessary due to the risk of loss, and with wildfires an annual real-life disaster scenario in California, those costs can be high. Others worry about out-of-control insurance rate hikes.
Dave Jones, the former California insurance commissioner who now serves as director of the Climate Risk Initiative at U.C. Berkeley’s Center for Law, Energy and the Environment, said home insurance companies last year basically got everything they said they needed to get them issuing new policies. “Specifically, the new regulations allow insurers to use forward-looking probabilistic models to determine the catastrophe load of the insurance rate and allow insurers to include the cost they pay for reinsurance, meaning their own insurance, in their rates,” Jones told U.C. Berkeley’s Jason Pohl. He said they also are now able to spread to all policyholders in the state the costs of claims that go beyond what the state insurer of last resort is able to pay (rather than having the insurance companies themselves have to make up the difference).
In California, the insurer of last resort is the FAIR Plan, which is a group of insurance companies that the state requires to provide fire insurance for property owners unable to acquire it elsewhere. The plan, established in 1968 in the wake of urban unrest and brush fires, sees itself as a temporary insurer, offering insurance “until coverage offered by a traditional carrier becomes available.”
FAIR refers to “Fair Access to Insurance Requirements.” FAIR Plans are not only in California; more than 30 states have them, as does Washington, D.C. For example, the Illinois FAIR Plan raised average rates in the state by 9.4 percent last year. And that’s in a state that doesn’t have to worry about massive forest fires or sea level rise (Chicago is nearly 600 feet above sea level).
‘Dave Jones, former California insurance commissioner, said home insurance companies last year basically got everything they said they needed to get them issuing new policies.’
Weather-related insurance difficulties are worldwide, and wildfires aren’t the only examples. In Great Britain, it’s flooding, and not from what you’d expect. Rising sea levels is a threat, but a fast-growing reason for homes losing insurance is from rainwater with insufficient open space for it to be absorbed into the ground. Build a cement-covered city, and you have to have somewhere for the water to go. According to Financial Times journalist Hugo Cox in late March, homebuyers and their agents are increasingly finding their purchase deals delayed or doomed by a pullout of their insurers. More and more of them are forced to use Flood Re, the government’s insurer of last resort. Wrote Cox, “The number of policies ceding flood protection to Flood Re … increased by 289,000 last year, a rise of 9 percent.” He cites a London broker specializing in high-end properties, who saw “[h]alf of her 69 London clients last year had their flood insurance backstopped by Flood Re, up from one in five in 2022.”
Back in California, where more than 100,000 people have lost their home insurance in the past five years, things are not going to get better. And that was before the horrific damage of the Los Angeles wildfires at the beginning of this year. Zhiyun Li and William Yu of the UCLA Anderson School of Management, estimated in March “Total property and capital losses could range between $76 billion and $131 billion, with insured losses estimated up to $45 billion.”
State Farm insurance reported having paid more than $1 billion for 8,700 claims as of Feb. 1 from the fires, and expects to pay much more. On Feb. 4, it was reported that State Farm was seeking a 22 percent price increase for its California homeowner policies. State Farm, AIG, and Allstate have all stopped writing new home policies in California. There are some new entrants into the market, such as a Chicago-based startup called Kin Insurance, which is actually entering the California market and is also active in other climate change hotspots like Texas and Florida; it is hoping its model of technology-driven assessment and low overhead will help it succeed where other insurers fear to tread.
But all of this means that those lower-than-the-national-average insurance rates Newsom touted in June 2024 are likely going to look quaint to California homeowners in years to come.
Headline of the week
“Billionaires and CEOs Bet on Cheap San Francisco Real Estate” (Bloomberg)
Go figure
16,000: number of “boots on the ground” fighting the Los Angeles area wildfires at their peak (governor’s office) … 24: percentage of Redfin survey respondents who are canceling plans for major purchases, such as cars or homes, because of the tariffs (Yahoo Finance) … 32: percent who told Redfin they would delay, but not necessarily cancel, such purchases …3: number of neighborhoods in Palo Alto, Calif., that made Niche’s list of the top 25 neighborhoods in the country (KTVU News) … 9.5: percentage of decline year-over-year in the median sales price of San Francisco condominiums (Compass) … 2-bedroom condos: the type of property with the highest number of sales in San Francisco in the past 12 months (Compass) … 812: number of lots in Chicago that must be sold by two sisters who had been dubbed “the city’s worst landowner.” They “accumulated fines topping $15 million due to rat-related code violations and for allegedly dumping hundreds of decomposing rubber tires that ‘piled multiple feet in the air’ on their lots. They then attempted to file for bankruptcy to skip out on the unpaid tickets and legal judgments.” (Realtor).
Say what?
“There’s never been an example like this, where there’s been a city that is thriving in so many ways, with a downtown where half of it is empty or for sale.”
—Ned Segal, former Twitter CFO, now San Francisco chief of housing and economic opportunity