Insurance companies State Farm and AllState have both announced that they will no longer offer new home and property insurance policies in California, which is driving more homeowners to the more-expensive FAIR plan, the “insurer of last resort.” The trend started after the catastrophic wildfires of 2017, when many insurers stopped renewing policies for properties in high fire-risk areas.
Mark Davis is an insurance broker in Ukiah who’s been losing companies for years now. More and more, he’s limited to offering customers policies through the FAIR plan, a co-op composed of all insurers that write basic property insurance in the state. The members share in the profits and losses of the co-op, according to their percentage of the market share. Davis says the cost of the FAIR plan policies is sometimes three or four times as expensive as policies from individual companies. He’s worried that more of those companies will follow State Farm’s lead. For now, though, he can still offer some policies in some parts of the county.
“We deal with a number of companies,” he said. “Most of them are still allowing in non-brush areas, non-fire areas, such as in the middle of town in Ukiah, or out in the valley, where they don’t have the forest.” But as for high-risk areas like Redwood Valley, Potter Valley, Covelo, or many other parts of rural Mendocino County, Davis says, “They are out of luck, except for the FAIR plan, which is just out-of-control expensive.”
Rex Frazier is the President of the Personal Insurance Federation of California, a trade group based in Sacramento representing large property casualty insurance companies. He does not speak on behalf of State Farm, which did not offer comment beyond its initial announcement. He echoed Davis’ concerns.
“For rural areas out in Mendocino County, do we really think that when State Farm no longer is taking new customers, there’s going to be a rush of other companies to Mendocino County, saying, hey, we want to write there?” he asked rhetorically. “My fear is that the FAIR plan is going to become the primary option, and if you have insurance, hang on to it.”
Richard Selzer is the owner of Selzer Realty and Associates ReMax Gold, a full service real estate company that handles residential and commercial properties, mostly along the 101 corridor in Mendocino County. He said State Farm’s recent decision “hasn’t struck home yet;” but the cancellations aren’t limited to rural areas. And there’s another cost to the FAIR plan.
Seltzer reported that he had spoken recently with someone who got an insurance cancellation in Yokayo Court, in the middle of a Ukiah subdivision. “It’s going to become worse,” he predicted. “The go-to is the California FAIR plan, which is very expensive.” In addition, he added, while the FAIR plan covers homes and property, it won’t cover personal property, like the contents of a house, or liability coverage. “So in addition to paying a very high price for fire coverage, you also have to buy an additional policy to cover the liability and/or personal property,” he explained. Also, if a borrower refuses to insure a home that has a loan on it, the lender can use something called “forced insurance,” which is even more expensive than the FAIR plan.
At the end of 2017, State Farm’s market share in California was 17.6%. Five years later, it had catapulted to 21.2%. It was the only company that was not non-renewing in fire-prone areas as homeowners scrambled for coverage. At the same time, the FAIR plan’s policy numbers climbed from 20,000 to 300,000. If the FAIR plan exhausts its reinsurance, Frazier says member companies will have to cover the shortfall.
“As the FAIR plan grows, and the threat of the FAIR plan running out of money grows, at some point companies are going to be looking at the FAIR plan growth and saying, wow, this is a gigantic unfunded liability for us. Do we really want to be exposed to that? At that point, the companies start non-renewing or pulling back,” he said, describing the current trend.
Davis, the insurance broker, expects increased premiums to have significant effects on development, too, “Because developers have to purchase large amounts of property insurance,” he pointed out. “If you’re building 300 homes to resell them, you have to have course of construction property insurance, which is fire insurance, which is absolutely affected by this problem.”
That’s unlikely to increase the availability of low-cost housing, according to Selzer’s analysis.
“Real estate runs on supply and demand,” he said. “Raising the cost of supply, which is restricting the supply, will reduce the number of homes that are available, and that tends to drive up the cost of all housing.”
Davis argues that insurance companies should be allowed to increase their rates to reflect the risk of multiple consecutive years of nearly unstoppable wildfires. “The Department of Insurance, while they think they’re helping the consumer by controlling rates on insurance policies, are having the opposite effect, because they’re stopping the product from being available,” he opined. “I would rather see a rate increase and have the product available for clients.”
Frazier, the trade group rep, adds that insurance companies are required to predict future risks based on past losses, rather than models of future climate change. And he’s found an unexpected ally in the industry’s fight to raise its rates. “When I started at this organization 19 years ago, it would be very rare that I would have an issue that brings me in contact with mainline environmentalists,” he said. “I would say for the last five years, that’s been a regular part of my workday, because so many environmentalists see the insurance industry as one of the few business groups that can actually connect a pocketbook impact with climate change.”
The forecast is mixed. Davis predicts that, “If we could get two or three years without wildfires, insurance companies will start to look at us again.”
But for now, Frazier believes that, “We’re still in a position where it may get worse before it gets better.”
