California’s Home Insurance Market in Crisis
The California homeowners insurance market is facing a crisis, with insurers reassessing their presence in the state. Devastating wildfires, resulting in an estimated $75 billion in damages, coupled with rising property values and a state assessment to support the FAIR plan, are leading to escalating premiums and limited options for homeowners.
State officials are imposing a $1 billion assessment on the California FAIR Plan, addressing the significant increase in claims stemming from recent wildfires, including the Palisades and Eaton fires. This comes after home insurance policies were once relatively more affordable in California compared to disaster-prone regions elsewhere in the U.S. The wildfires, however, have changed the landscape.
New state regulations require private insurers to contribute half of the initial $1 billion cost of the state’s plan of last resort, but the burden of future wildfire-related costs could fall on policyholders.
Patrick Douville, vice president at Morningstar DBRS, noted that the state’s insurance market challenges have made it difficult to support the FAIR Plan and provide affordable policies. “We’ve seen in these situations where you would try to ultimately get the next cohort of policyholders or future premiums to pay for it,” said Douville. “For that to happen, you need a healthy insurance market, which is not the case right now in California.”
National Trends in Home Insurance
The trend of consumers seeking cheaper property insurance is expected to increase nationwide in 2025, not limited to California. Data from TransUnion’s report indicates that consumers are shopping around for insurance, with percentages varying depending on credit-based insurance scores. The difference in profitability between auto and homeowners insurance has led some insurers to bundle offerings, using homeowners insurance as a ‘loss leader’ to boost auto insurance sales.
Climate Change and the Housing Market
Federal Reserve Chair Jerome Powell has warned that the withdrawal of banks and insurance companies from areas prone to flooding and fires will create regions where mortgages are unattainable. “I don’t know that it’s a financial stability issue, but it certainly will have significant economic consequences,” Powell told the Senate Banking Committee.
Further complicating matters is the 10-year Treasury yield, which Powell distinguished as separate from the Fed’s interest rate. Even if rates were to drop, pandemic-related issues will continue to impact a housing shortage in many regions.
Proposed Solutions and Policy Changes
California Gov. Gavin Newsom is supporting a proposal that would allow recipients of insurance payouts to earn interest on funds held in escrow. Assemblymember John Harabedian is sponsoring Assembly Bill 493 to address this current discrepancy. “Homeowners rebuilding after a disaster need all the support they can get, including the interest earned on their insurance funds. … This is a commonsense solution that ensures that they receive every resource available to help them recover and rebuild,” Newsom said in a press release.
Legal experts advising policyholders impacted by wildfires are urging homeowners to carefully review their coverage. Jason Rosenthal, an attorney at Much Shelist, stresses the importance of understanding the differences between replacement cost and actual cash value policies which can have material differences, leading to underinsurance. Rosenthal explained, “If you buy a million-dollar home, that includes the land, so there’s some value attributed to the land itself. But if you need to rebuild that home, the home itself could cost, if you’re building it from the ground up, a million dollars to rebuild.”
States with Highest Rate Increases
Data from S&P Global Market Intelligence shows that insurers in the Midwest increased rates significantly, while Florida and Texas saw more moderate increases. The states with the highest increases in homeowner insurance rates include Nebraska, Montana, Iowa, Minnesota, and Utah.
Rate Increase Dispute Settlement in North Carolina
Following public outcry, the North Carolina Department of Insurance settled a dispute with the North Carolina Rate Bureau, reducing proposed rate increases. The settlement allows for two 7.5% increases, alongside an agreement to keep rates constant until June 2027. Jarred Chappell, COO of NCRB, noted that the reduced increases may not adequately address the rising costs of insurance, citing factors such as storms, increased population in disaster-prone areas, construction-related inflation, and increased costs for reinsurance. “All these cost drivers remain an issue,” Chappell stated.
