Since late 2022, insurance companies operating in California and throughout the United States have changed the way they do business. We’ve seen insurance carriers implement stricter underwriting requirements, increase premiums, and in a few cases, discontinue new offering policies or even pull out of California entirely. The impacts of many of these changes have already had effects on business in the golden state and will continue to impact purchasing decisions throughout 2024. In this article we discuss many of the factors which have brought the industry to this current state of affairs, what you need to know when shopping for insurance, and my predictions for 2024 and beyond.
A Brief History of Recent Events impacting the Insurance Industry in California
Insurance is a highly regulated industry nationwide, and this is especially true in California. Since Proposition 103 was signed into California law in 1988, Auto, Home and Casualty insurers have been required to obtain prior approval from the California Department of Insurance (CDI) before changing policy rating factors and associated premiums. This approval process tends to take time to resolve; an average of 139 days in California according to a 2015 R Street Policy Group study. For context, 54 days was the average number of days to complete a rate filing review among the states studied.
Proposition 103 also created a requirement for any insurers requesting a 6.9% or higher average rate increase to be subject to review by Intervenors. Intervenors are typically non-profit organizations which are allowed to participate in the rate filing review process. When an intervenor contributes substantially to the rate filing review, they are then allowed to bill insurance companies for many of their costs. The cumbersome nature of the review filing process leads insurance companies to request lower rate changes than they may need, more often.
Catastrophe Challenges and Rising Costs
California has experienced some of the worst wildfires in its history in recent years, resulting in billions of dollars in insured losses and thousands of homes destroyed. According to a report by Resources for the Future, 14 of the 20 most destructive fires in California history have occurred since 2015. These disasters have increased the demand for insurance coverage, but also made it more difficult and expensive for insurers to provide it. Insurers face higher costs of repairing or rebuilding properties, paying out claims, and buying reinsurance to protect themselves from catastrophic losses.
Compounding difficulties, Proposition 103 also restricts California insurers from using predictive modeling to rate for wildfire and other risk exposures (unlike all other states), instead requiring rating based upon historical experience. This forces insurers to first pay for catastrophic claims in a region before they can charge premiums sufficient to insure the risk in that region.
CDI’s Rate Filing Review Moratorium
In an already difficult market for insurers to operate, CDI refused to review insurers’ rate filings for a period of 31 months, beginning March 2020 and ending October 2022. This prevented insurers in California from obtaining much needed rate increases at a time when costs were higher than typical. The lifting of this moratorium occurred about the same time the CDI Commissioner obtained his re-election, and many in the insurance industry believe the decision to enact this sort of moratorium was politically motivated.
During this rate filing review moratorium, global supply chain disruptions and inflationary costs ran rampant. It may not be obvious that supply chain disruptions impact the insurance industry, but the reality is they do. For example, insurance companies often pay storage costs while vehicles await repairs. In some cases, relatively minor vehicle damage can end up becoming total loss settlements because parts are not available.
Challenges Necessitate Change in the California Insurance Industry
Faced with rising costs and regulatory constraints a Los Angeles Times article explains, over half of insurers have reduced their exposure to high-risk areas or drivers by limiting or discontinuing new policies, non-renewing existing policies, increasing premiums and deductibles, requiring homeowners to take mitigation measures or simply implementing highly restrictive underwriting requirements before offering coverage. Auto insurers have added additional underwriting hurdles which include lengthy underwriting timelines, higher down-payment requirments, and extensive up-front documentation requirements prior to offering a policy.
In addition to these types of changes, insurers are attempting to cut costs through reduced commissions to sales representatives, corporate-level layoffs, divestiture of unprofitable lines of business, and simply streamlining processes. As of today, the CDI has approved 2,438 insurer requests (including rate and non-rate filings) in 2023 and there is no sign of an easing of filings. In addition to these changes, insurers appear to be making headway with the CDI. The CDI has stated they are aware of the problems with the current state of affairs and is working to streamline the review process as well as potenially allowing insurers to utilize predictive modeling in wildfire and catastrophe rating. Unfortunately all of these changes take time to implement and to show impacts to insurers’ bottom-lines. As we move into 2024, we will undoubedly see rates increase and continued difficulties in obtaining affordable insurance in many regions in California.
Predictions for 2024 and Beyond
The changes in the insurance market have reduced the availability and affordability of insurance for many California consumers, especially those living in high-risk areas. Consumers who cannot find or afford insurance through the private market may have to resort to the California FAIR Plan, a state-mandated insurer of last resort that offers limited coverage at higher prices. Consumers may also face difficulties in obtaining mortgages or loans if they lack adequate (or affordable) insurance coverage. Moreover, consumers may have to bear more financial risk and responsibility for protecting their properties from wildfires, such as by installing fire-resistant materials, clearing vegetation, or creating defensible space. These measures may be costly or impractical for some homeowners, especially those with low income or limited access to resources. For those who have purchased homes in areas perceived to be high-risk, my advice is to prepare for home insurance premiums to increase considerably. When considering the rising inflationary costs all of us are dealing with in addition to drastically increasing home insurance premiums, we will see homeowners in high-risk areas attempt to sell their homes. In cases where a buyer cannot be found and insurance and mortgage costs are unaffordable, we will undoubtedly see a rise in foreclosures in 2024 to 2025. The best advice I can provide if you think you will be impacted by these changes is to reach out to the insurance agency responsible for your insurance. Share your concerns and find out what options they have. Should you desire a second opinion, the Paul Munly Agency is available to assist you.
