Two new home insurers have abruptly announced plans to exit the California insurance market, further reducing options for residents in the state to protect their properties when risks of wildfires and other extreme weather events are on the rise.
AmGUARD Insurance, a subsidiary of Berkshire Hathaway-owned GUARD Insurance Companies, said it would withdraw its homeowners insurance policy and its personal umbrella policy program in California, while Falls Lake Insurance also announced plans to end its homeowners insurance program in the state.
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The insurers' plans, made public late last month, make them the latest in a growing list of California home insurers who have either scaled back or pulled out operations altogether in the state amid growing exposure to wildfires and a challenging reinsurance market.
State Farm, which is currently the largest home insurance provider in California, made headlines earlier this summer after it announced it would stop insuring new homes in the state, citing historic increases in construction costs, “rapidly growing” catastrophe risks, and reinsurance market challenges as the reasons behind its decision.
Allstate, another heavyweight in California, also quietly stopped issuing new property insurance policies in the state in June. And others still, including AIG and Chubb, have both declined to renew policies for thousands of homeowners living in California, citing risks of climate catastrophe and a pricing structure that does not allow for them to increase their premiums accordingly.
That’s prompted the number of homeowners in California who have lost coverage to soar in recent years, and nonrenewal of home insurance policies spiked by a whopping 30% in 2021 compared to the previous year, according to the most recent data from the California Department of Insurance.
California officials say that a rise in climate change-fueled disasters is the primary problem, but others, including insurers, say that poor management and regulation are to blame — pointing to California's 1988 insurance law as the primary driver behind their exit.
California is the only state that requires insurers to take into account 20 years of historical data when setting their premiums, leading to an insurance market that's more competitive and costly for homeowners than ever before.
That means property insurers in California can’t adequately price for risks from wildfires or other climate catastrophes that have ravaged the state in recent years, thanks to a combination of hotter temperatures, drought, and poorly managed forests. And as a result, they are leaving the state at a rate not seen in other parts of the United States.
While "plenty of other states have seen a rise in natural catastrophes" in recent years, none have seen a drop-off in property insurance the way California has, Jerry Theodorou, the director of the finance, insurance, and trade program at the R Street Institute, told the Washington Examiner in an interview earlier this summer.
Losses incurred during the 2017 and 2018 wildfire seasons alone were so significant that they wiped out more than 20 years of underwriting profits.
Insurance companies also purchase their own insurance, known as reinsurance, as a sort of shock absorber to help them manage losses past a certain point in the event of a disaster.
While reinsurance premiums have spiked in recent years to reflect the uptick in extreme weather, providers in California, unlike other states, are barred under state law from passing those costs along to consumers.
Insurance companies can cover climate risk and weather risk, "but they need the flexibility to adjust their pricing and their coverage so that it's something that doesn't bankrupt them," Theodorou said.
These problems are likely to get worse for homeowners as California endures more widespread and intense wildfires affecting more properties than ever before — and as reinsurance rates continue to spike.
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Allstate’s chief risk officer, Parr Schoolman, urged California policymakers at an insurance department workshop this summer to update the state’s insurance pricing model to more accurately account for wildfire risks.
“Without pricing enhancements, Allstate will remain closed to new business and will evaluate additional nonrenewals or the full withdrawal of property lines from the California market,” Schoolman said.