Property Insurance in California and Florida: A Problem of Availability and Affordability
By Anthony Cappelletti
General Insurance Insights, June 2024
Property insurance protects property owners from many types of loss including theft and damage. While not typically a mandatory coverage, its availability and affordability are important to society as it provides a risk-based mechanism for compensation from these losses. Without this coverage, those suffering losses may face severe financial hardship. Additionally, lending institutions will not provide mortgages without proof of coverage.
In the United States, availability and affordability issues have occurred for property insurance prompting government actions to address the issues. A notable example of this is flood insurance coverage. In the 1960s, private insurers in the United States were unwilling to provide this coverage as they did not have the information to price it properly. The government’s response was to set up the National Flood Insurance Program (NFIP) in 1968. The program has now been in operation for over 50 years and is likely to remain in operation for the foreseeable future.
The states of Florida and California (while distinct from each other in many ways) currently both have property insurance availability and affordability issues mainly stemming from exposure to catastrophic losses. Private insurers have been leaving these markets, exacerbating the issues. Many insureds are left with the residual market as the only option. In both states, government actions have been taken and more actions are being considered. But will these actions achieve the goal of making coverage available and affordable? In this article, I’ll look at the situation with property insurance markets in California and Florida focusing on homeowners coverage.
California
The state of California is currently experiencing major issues with the availability and affordability of homeowners insurance. This is occurring because seven of the top 12 property insurers in California have decided to pause or restrict writing business in the state.[1] This includes the largest property insurer in the state, State Farm, and the fourth largest, Allstate. In 2023, State Farm stopped selling new policies. Then, in March of 2024, State Farm announced that it would not be renewing policies for existing customers.
Many insureds are being forced into obtaining their insurance through the state’s residual market, the California FAIR[2] Plan, or go without any insurance coverage.
| The FAIR Plan was established so that all California property owners have access to basic fire insurance when access to coverage in the traditional market is not available through no fault of the property owner. California FAIR Plan www.cfpnet.com |
The FAIR plan is designed to be the insurer of last resort for high-risk insureds with rates that can be very high.
While the exodus of insurers writing new homeowners policies in the state may be viewed as the reason for the availability and affordability issues, it’s merely a symptom and not the cause. The following are the causes for the problems with availability and affordability issues in California homeowners’ insurance market:
- Significant insured losses from recent wildfire catastrophes;
- increasing risk of catastrophic losses from wildfires;
- higher cost of catastrophe reinsurance charged to the homeowners insurers;[3]
- rising cost of both construction materials and labor (in excess of general inflation due to demand surge, supply chain issues, and labor availability issues driving up the cost of insured losses[4]); and
- prior-approval rate regulation for homeowners insurance in the state limiting and delaying premium increases filed by insurers.
All of the above create a situation in which the issues with availability and affordability are certain to occur. Recent wildfire catastrophes in the state have made insurers reevaluate their exposures. Losses incurred were much higher than expected due to shortages of construction materials and a limited supply of construction workers. Reinsurers also reevaluated their exposures leading to an increase in rates charged to insurers. This caused insurers to file for significant rate increases in attempt to make the business profitable. Which brings us to rate regulation.
The government of California strictly regulates homeowners insurance rates in an attempt to keep rates affordable. California property rate regulation requires insurers to obtain prior approval from the regulator before new rates can be implemented. Prior approval rate filings in California are complex undertakings taking much time for insurers to complete. Rate filing reviews can take many months before receiving a response as to whether the filed rates are approved. Furthermore, insurers may only use historical data for ratemaking—California property insurance regulations do not permit insurers to consider reinsurance costs or future risks (e.g., increasing exposure to wildfire risk due to changing climate conditions).
Artificially suppressing rates makes coverage less available as insurers will be unwilling to write business if it’s deemed to be unprofitable. This is why State Farm, Allstate and a several other insurers have restricted writing homeowners insurance in the state.
In an attempt to alleviate the situation, the California Department of Insurance is considering regulatory measures that would permit insurers to use forward-looking models (e.g., to consider climate change effects on wildfire risk) for their property rates. However, an insurer must use a model approved by the regulator. Furthermore, to use the model they must write a certain proportion of properties in high-risk wildfire areas. The stipulation is that they must write at least 85% of their statewide share in high-risk areas. For example, if an insurer has a statewide share of 5% of the market, they would be required to write at least 4.25% of the market share in high-risk areas.[5] This regulatory measure will allow additional rate increases to account for risk. Whether or not this will make insurance more available remains to be seen. But it will certainly make it less affordable for some policyholders.
Which brings us to the issue of the California FAIR Plan. In 2018, the FAIR plan wrote $50 billion in property value over 123,000 policies. In 2022, this had risen to $210 billion over 261,000 policies.[6] This has now increased to over $300 billion in property value over 339,000 policies.[7] FAIR’s volume of business is quickly increasing putting its financial state in question. A single major catastrophic wildfire could require a significant assessment from all non-FAIR policyholders in the state to fund claim payments.
| We are one event away from a large assessment. There’s no other way to say it, because we don’t have the money on hand, and we have a lot of exposure.
Victoria Roach, president of the California FAIR Plan[8] |
A solution to the homeowners insurance problem in California is needed before the next major wildfire catastrophe occurs.
Florida
Much like the state of California, the state of Florida is also currently experiencing major issues with the availability and affordability of homeowners insurance. However, the issue is hurricane exposure not wildfire exposure. In Florida, many insurers have stopped writing property policies in the state. Some insurers have gone insolvent. Hurricane exposure is rising because of the following: Introduction of revised hurricane models, significant past hurricane catastrophes, and costs rising in excess of inflation. The problem in Florida has been going on longer than that in California. Florida’s residual market, Citizens Property Insurance Corporation (CPIC), is the largest property insurer in the state with over 1 million policies and $4 billion in premium.
| This is not the first time CPIC’s volume of policies has been of concern. CPIC’s policy count went from 800,000 in 2004 to 1.3 million in 2006. In 2011, the policy count reached 1.47 million. After 2013, the policy count reduced until it reached just under 420,000 in 2019. Since then, the policy count has steadily increased to 1.17 million as of Feb. 29, 2024.[9] |
CPIC is a not-for-profit, tax-exempt government entity funded by policyholder premiums. However, if CPIC experiences a deficit, Florida law requires the deficit to be funded by an assessment on most Florida policyholders.
CPIC was never intended to be the largest property insurer in Florida. It was supposed to be the market of last resort for high-risk insureds. Hurricane activity disrupts the market. After a major hurricane, reinsurers raise rates, some insurers go insolvent, and some insurers leave the market (or restrict policies written). If no major hurricanes occur over several years, reinsurance rates will be reduced, and some new regional insurers may enter the market. But then another major hurricane will inevitably occur, and the cycle will repeat.
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The period from 2020 to 2022 produced three years in the top 10 years of costliest Atlantic hurricane seasons.[10] |
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The following six Florida property insurers became insolvent in 2022: [11] |
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The cost of insurer insolvencies is paid for by the remaining solvent insurers in the state. The states guaranty fund, Florida Insurance Guaranty Association (FIGA), pays the claims and claims expenses (subject to rules that limit amounts paid) for the insolvent insurers and passes these costs to the policyholders of the solvent insurers through assessments. This would be in addition to any CPIC assessments.
Large FIGA assessments are spread over a couple of years so as not to hit policyholders with a huge assessment all at once. But FIGA no longer has reserves, so it has to borrow funds to pay costs not covered by assessments. The cost of borrowing is paid through future assessments.
A solution to the homeowners insurance problem in Florida is needed before the next major hurricane catastrophe occurs.
What Will Fix the Problem?
Without a doubt, something needs to be done in both California and Florida before the problem worsens. But there’s no single perfect solution to fix the problem in both states. A solution needs to be developed with the cooperation of government officials, regulators, insurers and policyholders. A solution could be modeled after the NFIP in which a government insurer underwrites exposure to the risk faced by these states (wildfires in California, hurricanes in Florida). Or perhaps a solution could be based on the federal Terrorism Risk Insurance program in which private insurers write the business and the federal government acts as the reinsurer for catastrophic losses for the risk. Or perhaps some other solution. Additionally, any solution needs to encourage mitigation of losses from the risk. Appropriate discounts should be provided to insureds that have loss mitigation features on their properties. Loss models used by the insurance industry need to properly incorporate credits for risk mitigation features. Governments need to be engaged in risk mitigation efforts by discouraging construction in high-risk locations.
The solution for California wildfire risk may be different to the solution for Florida hurricane. Also, while the issues are occurring in these two states, other states may be interested in the solutions. Wildfires can occur in almost every state, and hurricanes can affect many coastal states.
We, as actuaries, need to involve ourselves in the process of actuarially costing various alternative solutions so that decision makers have the relevant information to make an informed decision.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.
Endnotes
[1] yahoo!finance, Limited home insurance options in California as major carriers pull back.
[2] National Association of Insurance Commissioners, Fair Access to Insurance Requirements (FAIR) Plans.
[3] Howden Broking Group Limited, Howden’s renewal report at 1.1.2023: The Great Realignment.
[4] Additionally, labor availability and supply chain issues significantly increase the time to complete repairs which in turn increases claims for insurers as they pay claimants for additional living expenses for a longer period.
[5] abc10, March 15, 2024, California Department of Insurance proposes change to companies’ rate-setting process, and abc10, Sept. 26, 2023, Things to know about California’s new proposed rules for insurance companies.
[6] Insurance Information Institute, https://www.iii.org/table-archive/20793.
[7] California FAIR Plan Association, https://www.cfpnet.com/key-statistics-data/.
[8] In testimony to the California Assembly Insurance Committee, March 13, 2014, as quoted in E&E News by Politico, March 18, 2024, California’s insurer of last resort is a ‘ticking time bomb’.
[9] Citizens Property Insurance Corporation of Florida, https://www.citizensfla.com/policies-in-force.
[10] Wikipedia, List of costliest Atlantic hurricanes.
[11] WFSU Public Media, Sept. 26, 2022, Florida sees its sixth property insurer declared insolvent this year.