Is California Property Becoming Uninsurable?

In response to an inquiry from the San Francisco Chronicle, Allstate confirmed that it was no longer offering new property and casualty insurance policies in California, and in fact had stopped doing so in November 2022. With the decision, Allstate joins State Farm, which made an announcement last week, in shunning the Sunshine State.

While much of the media focus has been on the effect the decisions have on homeowners insurance in the state, the companies are also not writing new commercial property insurance policies.

“The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums,” Allstate wrote in an email to the Chronicle.

In its statement, State Farm said it “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

One implication in both statements is the impact of climate change, which has made California a highly combustible state increasingly subject to devastating wildfires. In this way, insurers are treating the threat of wildfire destruction in California the same way they treat hurricane destruction in Florida and Louisiana.

Climate change is not the sole issue driving the problem as industry groups are quick to point out. In a letter supporting Wall Street Journal Editorial Board article, the American Property Casualty Insurance Association said, “One key problem in the Golden State is that California’s insurance market operates under an outdated 1988 statute that is not flexible enough to adapt to the new realities of increasing risk caused by climate change. ...As the cost of insurance increases dramatically—due to climate change, historic economic inflation, and legal system abuse—insurers must be able to cover the costs of future claims in setting rates. That includes being allowed to factor in the cost of reinsurance in rates. It also means being able to use proprietary, reliable catastrophic models.”

In fact, the articles on Florida and Louisiana detail attempts in those states to protect the liability of insurance companies with the hope of stabilizing the property insurance market in those states, despite the uncertainties and added costs of climate change.

For businesses, insurance is always part of a robust risk mitigation strategy. The Allstate and State Farm approaches to California area good illustration—and warning sign—of how the depth and breadth of climate change can impact this important mitigation strategy, including the possibility of simply needing to account for risk of potentially uninsurable property.

“We just don’t have a stable insurance market,” California State Senator Bill Dodd, a Democrat from Napa, whose Northern California district has been charred by wildfires, told the Associated Press. “What’s happening is a lot of people in my district and frankly other districts are...going naked—they have no insurance.”