Why Insurance Companies Are Pulling Out of California and Florida, and How to Fix Some of the Underlying Problems

State Farm cited “catastrophe exposure” as a reason for ending new high-risk personal and commercial property and casualty policies in California. That refers to the likelihood that costly claims would exceed the risk State Farm was willing to accept.

Why Drop Only California?
So, why did State Farm and Allstate only stop new policies in California and not in other wildfire-prone states like Colorado or Arizona?

The answer can only be speculative since State Farm or Allstate don’t publicly disclose their exposure. That’s calculated based on how many personal and commercial property and casualty policies the company holds in the state, particularly in the wildland-urban interface where fire risk is higher, and at what value.

State Farm did cite California’s increasing wildfire risk and home construction prices, but there are other influences to consider.

One is state insurance regulations that can limit premium increases, prohibit policy cancellations and require certain levels of coverage. Insurer Chubb’s chief executive mentioned restrictions that left it unable to charge “an adequate price for the risk” as part of the reason for its 2022 decision to not renew policies for expensive homes in high-risk areas of California. California also has a unique “efficient proximate cause” rule that forces property insurers to also cover post-fire flooding, such as mudslides. Rainy winters like 2023’s often trigger destructive mudslides in wildfire burn areas.

What Happens Now?
When insurers pull out of a community, residents and companies without access to property and casualty insurance are left holding their own risk – and paying the price if a disaster strikes. From a societal and political perspective, that’s a problem.

Residents and businesses without insurance tend to recover more slowly. Uninsured residents often depend on donations, loans or federal individual assistance. The latter, however, is only available for catastrophic disasters and covers only immediate needs.

To fill the gap and provide access to insurance, states including California, Florida, Louisiana and Texas have created either private or public insurance options of last resort with generally very pricey premiums.

Residents covered by these options transfer their risk to the state, such as in Louisiana and Florida – meaning state taxpayers, who fund the state insurance programs, hold the risk directly or indirectly. In California, the privately insured FAIR Plan, in existence since 1968, wrote close to 270,000 policies in 2021, nearly double the number in 2018.

Similarly, anyone purchasing flood insurance through the National Flood Insurance Program since 1968 is transferring their risk to federal taxpayers. The NFIP currently insures almost $1.3 trillion in value across 5 million policies.

Politicians are not catastrophe risk experts, though, and do not make decisions based on data alone.

In the short term, I expect that insurance pools, as well as federal- and state-run insurers of last resort, will add more policies, and that state legislators will incentivize the return of insurers. But while the political willingness to support such a trend exists, the financial resources do not.

The National Flood Insurance Program has plenty of lessons to teach about the challenges of balancing exposure and keeping premiums affordable: It is more than $20 billion in debt. Texas has resorted to charging insurers operating in the state to help cover its program’s costs.

Fixing Insurance Starts with the Property Itself
Despite the risk of properties becoming uninsurable, communities today continue to permit development in floodplains, along coastlines and in the wildfire-prone wildland urban interface. Inadequate building codes allow developers to build homes that cannot withstand severe weather. These practices have placed millions of residents and the things they value in harm’s way.

As climate change continues to dial up the frequency and severity of natural hazards, there are some steps states and communities can take involving property to lower the risk:

·  Make smarter land use choices and limit development in high-risk areas to avoid placing people and the things they value in harm’s way.

·  Adopt more stringent building codes and safety standards at state and community levels.

·  Price risk into home sales, either through an insurance contingency that allows the buyer to withdraw when they cannot secure insurance or lower assessed property values for real estate in high-risk areas, which can dissuade builders and buyers.

·  Require comprehensive disclosures of all present and future risks along with historic claims associated with a property to educate potential buyers.

vMake risk information accessible and understandable. My research shows that most people have a hard time fully grasping how likely they are to be affected by a catastrophic event. They need better tools that communicate the information in a way that resonates with them.

·  Help residents in high-risk areas relocate through buyouts and managed retreat that returns the land to nature or public uses such as parks.

Melanie Gall is Assistant Professor and Co-Director, Center for Emergency Management and Homeland Security, Watts College, Arizona State University. This article is published courtesy of The Conversation.