By Drew Lewis, Broker, California Meridian Insurance Services, Inc.
Recent wildfires have seared the property insurance market for some homeowners and businesses in the Golden State. According to the California Department of insurance, in 2017, for every $1 of premiums collected for homeowner’s insurance coverage, $2.01 was paid in out in claims, a loss ratio of 201%. In 2018, the loss ratio was 170%. This number does not account for administrative costs, including commissions, so the real damage is considerably worse. For reference, insurance carriers generally prefer a less ratio below 50-60% so they can still turn an underwriting profit after adding in administrative costs.
The reaction from the insurance market has been to pay claims and reassess their underwriting exposure and rate structure. The current underwriting model no longer works in California and has made the Golden State a more complicated place to write property insurance. Insurance carriers are being more strategic as to where they want to offer homeowners insurance and will continue to turn away from writing properties in higher risk areas. This has led to a wave of policies being non-renewed (235,274 dropped policies in 2019, a 61% increase vs. 2018) and many homeowner’s now having to find replacement coverage at a significantly higher rate.
Ricardo Lara, the California Insurance Commissioner, issued the first ever statewide non-renewal moratorium in late 2019 which offered some limited protections to homeowners in certain affected areas. Mr. Lara will continue to be under pressure to do more for consumers as the 3.6 million California householders in the “wildland urban interface” face insurance challenges in the future. Dropped consumers who cannot find suitable coverage have been forced to turn to the California FAIR Plan, an insurance pool established in 1968 which is backed by capital and surplus of all insurance companies writing property insurance in California. The FAIR Plan is writing more business than they would like to, with enrollments up 225% in 2019.
Wildfire losses have pinched the balance sheets and income statements of insurance carriers and has led to the insolvency of a small regional insurance carrier, Merced Mutual. Large, diversified insurance carriers benefit from writing other lines of business which have performed relatively well, such as Worker’s Compensation coverage and other casualty lines. Wildfires and increased insurance costs hurt housing affordability in California and may make it more difficult to sell a property if reasonable insurance cannot be obtained.
The model of our industry is to turn an underwriting profit and make money through conservative investments. With interest rates at historic lows, the underwriting profit of an insurance carrier is even more important as there is less money to be made via conservative investments. The fires of 2017 almost wiped out the insurance industry’s profits in California from 2001 to 2016, according to a RAND Corporation report from 2019. This leaves insurance executives with a lot on their minds and pressure to take rate increases to recoup losses. Continue to expect property insurance rates to increase for the foreseeable future.
Disclaimer: Drew Lewis is an agent for Caifornia Meridian Insurance Company and does not work for Rothman Investment Management. This is not intended as investment advice.