What California Homeowners Should Know About the Current Property and Casualty Marketplace

Traditionally, homeowners insurance, while sometimes expensive, was readily available in the marketplace. Unfortunately, this picture has changed dramatically for many in California. This is because an increasing number of Californians have seen their insurance premiums rise significantly or, in the extreme, have had their policies cancelled (the industry terminology is “non-renewed”). Why is this occurring? Because multiple years of catastrophic wildfires, not only in California but in many parts of the country, have cost the industry billions of dollars in covered claims and upended the market.

With such substantial losses, insurers have been increasing premiums on new and existing policies throughout the state (and in other areas of the country). They have also been dropping coverage for homeowners in higher-risk areas – refusing to renew policies as a means to reduce their overall risk of loss.

According to an article on the Bloomberg News website, in October, California’s insurance regulator reported that insurers refused to renew 235,250 home insurance policies in 2019. This was a 31% increase from the prior year. In ZIP codes that had a moderate to very high fire risk, non-renewals jumped by 61%.

It should be noted that the California insurance commissioner has imposed a one-year moratorium on policy non-renewals for homeowner policies in designated ZIP codes directly affected by the catastrophic wildfires of the last few years.

While the California insurance commissioner’s office and the insurance industry are seeking longer term solutions to this current crisis, at present, homeowners and home buyers are facing real challenges in getting insurance coverage in areas deemed to be higher risk. The reality is that in almost every instance, property insurance can still be acquired – but this is often at a cost thousands of dollars more than what a homeowner was previously paying.

What does this mean for you?

Given the current state of the market, homeowners need to be prepared for premium increases on existing policies (if such increases have not already been experienced). Those in high-risk areas may also be subject to non-renewal. If so, insurers are now required to provide policy holders with 75 days advance notice of pending non-renewal (this is an increase from the 45 days previously required before 2021). This is intended to provide policyholders with the time needed to find alternative insurance coverage.

For homeowners notified of a pending non-renewal, you’ll need to take immediate action in contacting your insurance agent to explore the options available. If you work with an independent agent, they can “go to market” to determine whether there are other insurers willing to issue a policy. If you work with one of the larger middle market insurance companies such as State Farm, AAA, Farmers and others, this likely won’t be an option as these middle-market companies typically offer only their own policies and do not sell policies from other insurance companies. If this is the case, you’ll want to speak with an independent agent to explore options that may be available.

In some instances, it may be necessary to work with a “surplus lines” insurer that can write policies for California but does not generally serve this market. Lloyds of London would be an example of such as company. California also has coverage through the FAIR Plan which effectively acts as an insurer of last resort. FAIR Plan policies provide essential dwelling coverage but lack meaningful areas of coverage usually available as a part of a standard home policy. As a result, homeowners who purchase a FAIR Plan policy must buy a second supplemental policy (called a Difference in Conditions” or DIC policy) to cover those losses the FAIR Plan policies do not. According to the California Department of Insurance, from 2018 to 2019, there was a 36% increase in the number of FAIR Plan policies issued.

For those looking to purchase a new home, we strongly recommend that you speak with your insurance agent before making an official offer on any potential real estate purchase. Areas of the state that that may have been acceptable to insurance carriers two to three years ago are now being scrutinized carefully and, in many cases, being declined. This can result in ending up with property insurance that may be less comprehensive than before but carry premiums that are thousands of dollars higher than would have been the case just a few years ago.

If you’re notified of a pending non-renewal or a substantial increase in your homeowners policy premium, your first call should be to your current insurance agent who should certainly be a resource for you. But we also ask that you speak with your financial advisor, who can often be a valuable resource in considering options and, when appropriate, can connect you with an independent insurance agent who can serve you.

Private Ocean is a West Coast-based wealth management firm deliberately structured to give clients the intimate experience of a small firm while harnessing the power, depth and discipline of a much larger one. Formed in 2009, the firm has locations in San Rafael, San Francisco, and Seattle. 

Kevin Gahagan, CFP CIMA, is a financial advisor who specializes in providing advanced financial planning, retirement solutions, and investment strategy. Gahagan is a frequent speaker on investment strategy, financial planning, and retirement planning and has been a featured guest on a number of national and local radio and television programs. 

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