You may have heard that several large insurance carriers including State Farm, Allstate, and Farmers have recently announced that they will not be offering new homeowner insurance policies in California. The reasons for this include increased claims from catastrophic wildfires due to climate change, rising reinsurance costs (insurance companies buy insurance as well), and a regulatory environment that restricts the ability of insurance companies to raise rates. It’s also worth noting that the Florida insurance market has experienced similar issues due to hurricane damage in recent years.
How Did We Get Here?
In 1988, proposition 103 which was positioned as a consumer protection measure, reached the ballot. Hundreds of millions of (adjusted) dollars were spent promoting the proposition and it passed with a narrow 51% to 49% margin. The primary impacts of the proposition included:
- Requiring insurance companies to obtain prior approval from the California Department of Insurance (CDI) before implementing rate changes
- Rolling back rates by 20%
- Making the California Insurance Commissioner an elected position
- Creating a process for consumer participation in the rate-setting process
- Requiring insurance companies to pay a fee to the CDI for each rate change
Prop 103 is credited with saving California consumers billions of dollars over the past 45 years. It also heralded an area of greater transparency for the insurance industry. It increased consumer participation in the rate setting process including electing an insurance commissioner which previously had been a political appointment.
Yet the proposition has also had unintended impacts on insurance carriers. Insurance companies are restricted in how much they can increase rates, even when they are experiencing losses due to claims outpacing premiums. They are also prohibited from using forward looking projections to set rates. Climate change is increasing the risk of wildfires and floods in California, but insurers can only use historic data to set future rates which inevitably discounts the actual amount of future claims. All of this has made it more difficult to profitably operate in California which leads us to where we are today.
How Does This Impact the Real Estate Market?
What do these changes in insurance availability mean for buyers and sellers of real estate? The short answer is, nothing good. Some likely impacts of these developments include:
- Reduced Availability of Insurance: The departure of insurance companies is clearly leading to a decrease in the availability of insurance coverage for properties in certain areas. Homeowners and real estate buyers will find it more challenging to secure insurance for their properties, particularly if they are located in high-risk areas prone to natural disasters like wildfires or earthquakes. This is certainly true for many properties in Berkeley and the surrounding areas.
- Higher Premiums: With fewer insurance options available, the remaining insurance providers have increased leverage to raise premiums. This will mean higher insurance costs which will further impact housing affordability and the overall cost of homeownership.
- Decline in Property Values: The limited availability of insurance or higher premiums can negatively impact property values. Buyers may be hesitant to invest in properties that are difficult to insure or come with high insurance costs, which could lead to decreased demand and lower property values in affected areas. That said, given the limited inventory available in our local market, this may not be much of an issue in the near term.
- Impact on Mortgage Lending: Mortgage lenders typically require homeowners to maintain insurance coverage as a condition of their loans. If insurance becomes more scarce or expensive, it could potentially affect the ability of buyers to secure mortgages, leading to a further slowdown in real estate transactions.
So where does that leave property owners or buyers seeking for homeowners insurance? First, there are still a number of insurance providers continuing to operate in the market. One of the most reputable is Farmer’s Insurance, but there are others as well. If you need help getting a quote, reach out to me for a referral to qualified insurance broker.
If you can’t find an insurer who’s willing to cover your particular property, there is a provider of last resort: The California FAIR Plan.
California FAIR Plan
The California FAIR (Fair Access to Insurance Requirements) Plan is a specialized insurance program designed to provide property insurance coverage for individuals who are unable to obtain it through traditional insurance companies. It was established in 1968 after a series of devastating wildfires left many homeowners in California without insurance coverage.
The FAIR Plan is not an insurance company itself but rather a state-managed association. It operates as a joint effort by insurance companies doing business in California. Participating insurance companies are required to collectively provide coverage to high-risk properties that have been denied coverage in the voluntary insurance market.
Here are a few key points to understand about the California FAIR Plan:
- Eligibility: The FAIR Plan provides coverage for residential properties such as homes, condominiums, and rental properties that meet certain criteria. Properties located in designated high-risk areas typically prone to wildfires may qualify for coverage.
- Basic Coverage: The FAIR Plan offers a basic insurance policy that provides coverage for fire, smoke, vandalism, and liability. However, it typically does not include coverage for perils like earthquakes or floods. Policyholders may have the option to purchase additional coverage from other insurance providers to supplement their FAIR Plan policy.
- Availability and Application: If individuals have been unable to obtain property insurance through the regular market, they can apply for coverage through the FAIR Plan. Applications are generally submitted through insurance agents or brokers who are authorized to write FAIR Plan policies.
- Last Resort: The FAIR Plan is considered a last resort option for property owners who have exhausted their efforts to find coverage in the voluntary market. It is intended to provide essential coverage for those who would otherwise be unable to insure their properties.
It’s important to note that the California FAIR Plan should be seen as a safety net for those who cannot find insurance elsewhere. While it can provide coverage, the premiums for FAIR Plan policies are typically much higher than those offered by traditional insurance companies. Property owners are encouraged to explore other insurance options first before considering the FAIR Plan. However, given the current state of the insurance market, the FAIR plan may be the only available option to ensure certain high risk properties.
Regardless of whether you’re planning to buy or sell, an important part of the puzzle to help you make an informed decision is to get a CLUE (Comprehensive Loss Underwriting Exchange) report. This report is similar to a credit report, but for your auto and home insurance history. The report is used by insurance companies to view a consumer’s claim history and to determine the potential risk for underwriting a home insurance policy.
The report typically includes the following information for the past seven years:
- Date of any claims
- Loss type
- Amount the company paid
- Policy number
- Claim number
Whether you are a buyer or a seller, it is increasingly important that you obtain a CLUE report prior to transacting in real estate:
- CLUE report for buyers: It’s beneficial to request a CLUE report from the seller when making an offer on a home. The report can help you understand if the home has had serious damage in the past, frequent claims, or any other issues that might affect insurability or the insurance cost. For instance, a home with multiple water damage claims might have ongoing issues that need to be addressed, and it may be more expensive to insure.
- CLUE report for sellers: Reviewing your own property’s CLUE report can be helpful to understand what information is being disclosed about your claim history. It can also allow you to correct any errors in the report, which could potentially lower your insurance premiums. Also, when going to sell your home, buyer’s want the confidence that they will be able to acquire home insurance to qualify for a mortgage and to protect their property from potential future damage.
Consumers can request one free CLUE report annually from LexisNexis. Keep in mind that the CLUE report only contains information about claims made, not about inquiries, and not all insurance companies report to LexisNexis, so the report may not contain complete information. Also, the report may include $0 claims which can impact your ability to qualify for a policy, or could result in higher premiums. This includes claims that were made but aren’t covered by the policy. This is typically a claim that was not paid by the insurance company, but is still reported.
What Does This Mean for Buyers and Sellers?
Though the situation may be challenging, there are things that buyers and sellers can do to remain active in the local real estate market.
- Don’t panic. Circumstances are fluid and will continue to evolve over the next year.
- Make sure you have access to a good, local insurance broker who can provide you with coverage options.
- Be prepared to pay more for insurance. This is just a reality based on increasing risk due to climate change. Regardless of how the situation gets resolved at the regulatory level, higher insurance prices are here to stay.
- Get a CLUE report to understand the coverage risks and to help your real estate agent form an appropriate buying or selling strategy based on your specific property.
- Get a quote from a insurance provider to understand if coverage is available for the subject property and what the costs will be.
- With non-contingent offers, it is of particular importance that you confirm both insurability and ascertain if the cost of the policy is acceptable to you. An inability to procure insurance coverage is not a means of cancellation without the protection of a contingency.
- Work with an experienced real estate agent who is informed about these rapidly changing conditions. You need a Realtor who has current information, insurance agent recommendations, and can knowledgeably discuss how to think about the long-term impacts of these shifts.
It’s worth noting that most carriers have not stated they will cancel any existing homeowner insurance policies. At this point they are just declining to write new policies. This could certainly change over time, so it is worth having a good relationship with an insurance broker in the event you need to look for a new policy. For recommendations, please contact me. I work with insurance companies regularly and have reliable providers to suggest.
Also, the California insurance market is big. REALLY big. With more than 40 million people and 15 million homes to insure, nearly every major insurance company wants to do business in the state. Much of the move to stop writing new homeowners policies is seen as a way to place political pressure on the state to overturn or work around prop 103 restrictions. It is inevitable that the regulatory environment that is making it prohibitively expensive for insurance companies to do business in California will be eventually reformed.
But in the meantime it will probably get worse before it gets better. The best way to prepare yourself is to be informed, stay calm, and do your homework to understand the risks and opportunities that are available to address the limits of insurance coverage. Also, make sure your real estate agent is up to date on the most recent developments and can advise you on best path forward based on your specific situation.
With knowledge, great representation, and patience, you can still succeed in this challenging real estate market, and I intend to be there to support you every step of the way.