The home insurance landscape in California is facing significant changes as two of the state’s largest providers, State Farm and Allstate, have announced their decision to no longer accept new applications for homeowners insurance. This development has raised concerns about the availability and affordability of home insurance coverage in the state, as well as its potential impact on the housing market. The companies said they will continue to serve existing customers and will continue to offer other insurance types, including auto insurance.
Reasons for Departure
State Farm and Allstate have attributed their decisions to various factors affecting the insurance market in California. State Farm, in its May 26th, 2023 statement cited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” The company specifically mentioned the risk of wildfires and expressed its commitment to continue working to find solutions with the state, suggesting that it does not intend for this change to be permanent.
Allstate announced its decision a week later, though the company halted issuing new policies last November (see top of page 4 of Allstate’s 2022 third quarter report). “We paused new homeowners, condo and commercial insurance policies in California last year so we can continue to protect current customers,” Allstate told CBS News on June 2nd. Allstate echoed similar sentiments of higher costs to insure homes in California due to wildfires, pricier home repairs, and higher reinsurance premiums. Reinsurance is insurance that an insurance company purchases to reduce its financial risks.
Both companies noted the regulatory constraints imposed by Proposition 103 as a challenge in adjusting their rates to cover the increased costs adequately.
Impact on Customers
Homeowners in California may find it increasingly challenging to secure coverage in the future, and buying a home in California may also be harder. While the state of California does not require homeowners insurance, many lenders mandate buyers to have a policy in place. However, the California Department of Insurance reminded consumers that there are still over 110 insurance companies who are continuing to write new policies for homeowners insurance.
Yet, reduced competition in the homeowner market could result in higher premiums for homeowners, similar to what has been observed in states like Florida. The state-run option, the California Fair Access to Insurance Requirements Plan, which provides basic fire insurance coverage for properties in high-risk areas when traditional insurance companies are unwilling to do so, may face issues as homeowners seek alternative options. Enrollments jumped to 272,846 homes in 2022, which is double what it was in 2018.
According to the DOI, current State Farm homeowner insurance customers won’t lose coverage, and people will still be able to renew their existing policies. The department has not commented on Allstate’s departure. Still, homeowners are concerned that future claims, even small ones, could lead to non-renewal.
The Role of Proposition 103
California’s consumer-oriented policies, most notably Proposition 103, have helped keep insurance rates relatively low for Californians. However, the insurance industry has argued that these policies hinder accurate underwriting and pricing of risk. This is in part because Prop 103 grants the state’s Insurance Commissioner authority to reject rate increases and order refunds.
Climate change and other factors like the accumulation of wood fuel in forests have worsened the impacts of wildfires in the last 20 years, particularly in the last 5 years. There are also more people moving into fire-prone areas, and the cost of repairing damaged or destroyed homes is rising, according to the Insurance Information Institute.
Insurance companies, including State Farm and Allstate, have sought significant rate increases in the past, but Prop 103 also allows consumer advocates to contest premium increases of 7% or more. And, Prop 103 makes California the only state that prevents insurers from incorporating the cost of reinsurance into the price of coverage. The departure of these insurers could put pressure on California to reconsider these policies in order to ensure the availability of affordable coverage for homeowners.
Response from Consumer Advocacy Groups
Consumer advocacy groups have criticized State Farm and Allstate’s decisions, considering them unlawful. “Under Proposition 103, insurance companies can’t just stop selling insurance to consumers in order to make more money for themselves,” said Harvey Rosenfield, the author of Prop 103 and founder of Consumer Watchdog. “They have to open their books and get the Insurance Commissioner’s approval.”
Rosenfield further claimed that insurers in California have generated substantial profits, and that this is a calculated move to push for higher rates that are not justified. “Over the last 20 to 25 years, they’ve taken in tens of billions of dollars more than they’ve paid out in claims during that time.”
The 2021 California Property and Casualty Market Share Report shows State Farm’s incurred losses were around $4 billion, but it had over $7 billion in written premiums for the year. Allstate had around $2.7 billion in losses compared to $4.4 billion worth of premiums.
Rosenfield emphasized that under Prop 103, Commissioner Lara has the power to declare a state of emergency and mandate State Farm and Allstate to resume offering homeowner insurance policies—or risk being disallowed from selling other forms of insurance in California.
The departure of State Farm and Allstate from California’s home insurance market has created significant challenges for homeowners and the insurance industry. The situation underscores the need for a comprehensive and collaborative approach involving insurance companies, regulators, and consumer advocacy groups to ensure the availability and affordability of home insurance coverage in the state.
In the meantime, homeowners are advised to proactively seek alternative insurance options and follow the DOI’s Tips for Finding Residential Insurance. Consulting with independent insurance agents who work with multiple carriers can help homeowners navigate the changing landscape and find suitable coverage.
Homeowners should also consider implementing risk mitigation strategies, such as fortifying their homes against wildfires and other hazards, to increase their insurability and potentially lower premiums. In October 2022, the DOI announced it would start giving an insurance discount to consumers that adopt new home standards for fire mitigation.