California wildfire near houses

State Farm and Allstate stop writing new homeowners insurance policies in California because of wildfires

Amid fast-rising construction costs, the ever-increasing risk of wildfires and the “challenging reinsurance market,” casualty insurance giants Allstate and State Farm have stopped writing new homeowners policies in California, causing much uncertainty and leaving some new homeowners scrambling.

State Farm and Allstate – the state’s largest and fourth-largest property insurer, respectively – have been dealing with hefty financial losses following the increase in wildfires in recent years in California. 

State Farm said the decision to halt new homeowners policies in the state was “due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market.”

INSURANCE GIANTS HAD ALREADY ASKED FOR 28%-PLUS RATE INCREASES

Existing customers with homeowners insurance in California have some of the lowest premiums in the nation, about $1,300 compared to the average of $2,000 in other states and $4,000 in hurricane-ravaged Florida, according to the Insurance Information Institute.

But the cost for new customers – such as families who become first-time homeowners – is much higher, as the insurance companies attempt to offset the incredible losses from wildfires in recent years. State Farm had already requested a 28% rate increase, with Allstate seeking 40%, according to the California Department of Insurance.

The cost of homeowners insurance could affect the housing market since mortgage companies require borrowers to have coverage. Some real estate brokers have already said deals have fallen through because the cost of coverage for homeowners in some areas was too high. 

“In certain high-risk areas of the state, there are very few insurance companies willing to write new policies,” according to a statement from the California Association of Realtors. “In some higher-risk areas, State Farm was the last private insurance company writing policies. There is still a wide range of companies writing policies in California. However, those willing to write new policies in higher-risk areas, in particular, are declining.”

115 INSURANCE COMPANIES CONTINUE TO WRITE HOMEOWNERS’ POLICIES IN THE STATE

Climate change has become a critical issue for insurance providers, with the number and devastation of wildfires soaring. Half of the state’s 20 most destructive fires – based on structures lost – have occurred in the past five years, according to CalFire.

The Camp Fire, the state’s largest that destroyed the city of Paradise in fall 2018, burned 18,800 structures and killed 85 people. 

About 115 insurance companies, such as Geico and Progressive, continue to offer homeowners insurance in the state. But the premiums are rising – and will likely continue to increase for at least the next few years, experts say.

And those costs affect all homeowners, from those in the Bay Area where wildfire risk is extremely low compared to those in the Sierra foothills, where the likelihood of a catastrophic wildfire is extremely high.

Insurance companies have battled fast-rising costs to cover homeowners who have suffered significant losses from wildfires in recent years in California./SHUTTERSTOCK

GOLDEN STATE PLAN TAKES ON MORE HOMES — AND RISK

State Farm and Allstate’s decision to stop writing new policies will create more of a financial burden on California’s FAIR plan, a state-mandated insurance pool that acts as a provider of last resort. The FAIR plan covers about 275,000 homes, a 70% increase since 2019. 

California Insurance Commissioner Ricardo Lara says the state cannot demand State Farm and Allstate provide homeowners insurance in the state. The department has been addressing the issue and taken efforts to reduce the risk of wildfires. Consumers can learn more about the effort on the department’s website.

Climate change continues to increase the risk of natural disasters – and, most notably, wildfires in California. But none of the 10 highest-risk areas from natural disasters are in California, according to a CoreLogic report. Floods and hurricanes are more likely and pose a much higher risk for residents and insurance providers.