California is the definition of a hot mess, housing-wise. Wildfires, droughts, food shortages, and pollution levels are all projected to intensify this year, according to the 2023 National Climate Assessment. While long-time residents of the Golden State are loath to let wildfire smoke cloud their beach days, homeowner insurance carriers are struggling to take the heat.
Against a backdrop of increasingly frequent and severe extreme weather, an inability to profit at risk-based pricing has been exacerbated by economic inflation and regulations capping or delaying rate hikes, ushering in a scorched-earth policy for carriers who are packing up shop and getting the heck out of dodge.
According to the California Department of Insurance, California’s home insurance market shrunk drastically in 2024 after seven of the top-12 carriers — 35% of the state's insurance market in 2022 — exited or stopped writing new policies in the past year. Many of those leading providers are industry giants like Allstate, State Farm, Farmers, USAA, Travelers, Nationwide and Chubb. Yet, a handful of smaller companies like Merastar Insurance Company and Kemper Independence Insurance Company have also announced plans to exit the California market this year.
State leaders are calling the insurance situation a crisis. California Governor Gavin Newsom signed an executive order in September 2023, urging prompt regulatory action to enact reforms that would prevent more insurers from leaving. Prompt regulatory action remains elusive as insurance companies continue to leave and the state’s last resort solution, the FAIR Plan, faces solvency issues.
In the wake of insurers’ exodus, California residents are left with few to no options for homeowners insurance, adding stress for mortgage lenders already struggling with today’s market challenges, like low inventory and affordability. Meanwhile, finding coverage with remaining carriers comes at a much higher price.
Guaranteed Rate (G-Rate) Insurance conducted a nationwide study in November 2023 to track the growing problem, and found that along with Florida and Texas, California has also experienced particularly steep rate hikes. “The reason why premiums are going up is due to losses,” said Jeffrey Wingate, executive vice president and head of insurance at G-Rate. “Over 70% or more of their losses that they’re [home insurance carriers] paying out are coming from storms.”
That entails additional headwinds for homebuyers and mortgage lenders in this already-tough market environment. More originators are saying that they help clients gather insurance quotes so they can get to closing. But, still, originators say that more buyers are getting pushed to the sidelines. As climate risks worsen, the hopes of a market rebound are going up in smoke.
“It's self-evident that [climate risks] caused increases that consumers weren't aware or prepared for.”
Alec Hanson, Chief Marketing Officer, loanDepot
Climate Risk Impact
Alec Hanson, chief marketing officer at loanDepot, said living in the state for the past 42 years has made him a bit jaded. Like many other California natives, he can have a cocktail on the patio while a cloud of smoke billows in the distance like an incoming freight train. Once upon a time, that was just a small price to pay for a sun-kissed life on the Gold Coast.
“I literally filmed a podcast today where we had a mini earthquake happening in the middle of it,” Hanson said. But, even those jaded, long-time California residents are showing concern. “Granted, I think there is a call for awareness of things getting worse,” he adds. “Obviously, the fires in the last few years have been horrendously worse than anything I remember.”
When an earthquake strikes mid-podcast, Alec Hanson, Chief Marketing Officer of loanDepot, says the show must go on!
Scientists from the U.S. Global Change Research Program say climate change has made the western U.S. warmer and drier over the last three decades; that will drive the occurrence of more extreme weather, like making wildfires more frequent and destructive. In recent years, California has experienced the largest and most destructive fires in state history.
“So many carriers have pulled out of the market because of the wildfire risk in California. And then, on top of that, all the storms that we’ve been having,” Wingate said. “These storms have never happened before… they call these secondary perils and the primary peril would be fire.”
The impact on homeowners’ insurance costs was swift and drastic. Another study by G-Rate Insurance, “How to Navigate the Home Insurance Market in 2024,” shows that the insurance crisis is not just confined to California. Premiums rose, on average, 19% nationwide from 2022 to 2023, also rising 55% on a cumulative basis since 2019 – a new record, the report stated. In California, premiums rose 13% on average from 2022 to 2023.
“It’s kind of a trifecta in terms of what’s happening in the market,” Wingate said. “Because of inflation, the cost to rebuild a home if it were to get destroyed, the cost of materials, the cost of trades. So the limits of the policies are going up, deductibles are going up, and premiums are going up.”
Jeff Wingate, EVP and head of insurance at Guaranteed Rate, shares insights from a nationwide study on home insurance premiums.
G-Rate’s study found more homeowners opting for a higher deductible in order to lower the cost of monthly premiums. Homeowners typically carry deductibles ranging between $1,000 to $2,500, but that segment is down 17% as more have opted for higher deductibles. Meanwhile, those paying deductibles between $5,000 to $10,000 increased nearly 50%. The study recommends increasing the deductible as a way for homeowners to save money up front.
However, a key reason why some insurers have stopped writing new policies or exited the market altogether pertains to a 35-year-old piece of state legislation, Proposition 103.
“Prop 103” was passed in 1988 to protect insurance policyholders from unjust rate hikes, meaning carriers are required to seek approval from the California Department of Insurance before adjusting rates. The slow pace of approval delays the rate-raising process, effectively freezing home insurance premiums at an unsustainable rate. In short, it has become cost-prohibitive for companies to take on new home insurance liabilities at those rates.
Many of the insurance companies cited increased construction costs alongside inflation, and exposure to catastrophes as reasons to taper off coverage or leave the Golden State.
“It's self-evident that [climate risks] caused increases that consumers weren't aware or prepared for,” Hanson said.
“It’s kind of a trifecta in terms of what’s happening in the market. Because of inflation, the cost to rebuild a home if it were to get destroyed, the cost of materials, the cost of trades.”
Jeffrey Wingate, Executive Vice President and Head of Insurance, Guaranteed Rate
Borrower Impact
For originators, the whirlwind of climate disasters couldn’t have come at a worse time.
The market forecast was positive at the San Francisco-based brokerage, SunnyHill Financial, when 2024 began, said co-founder and CEO Tyler Flora. He reported that more borrowers were comfortable with interest rates being in the sevens, and he’d frequently hear them say they’d rather buy the home now while it’s available and refinance the rate later. That optimism, he added, was likely fueled by the short-term outlook that rates would come down later in the year.
Now, home insurance issues are throwing a wrench into more of their deals.
“Last week, we had a client that was gonna make an offer on a house,” Flora said. “They were ready to go, happy with the mortgage, happy with the taxes.”
But, when the client called to get an insurance quote before going under contract, as Flora suggested, the deal ended up falling through. Flora says that, among his borrowers, insurance quotes are usually four times higher than they were last year – and that’s if they can even find an insurance policy.
“The insurance came back at $12,000 a year on a million-dollar home,” Flora said. “That is extremely high because of the lack of competition in the insurance space and just people leaving the California market. And it really is affecting the ability for people to sell their homes.”
Brian Cooke, co-founder and vice president of sales at SunnyHill Financial, describes the impact on first-time homebuyers.
Brian Cooke, co-founder and vice president of sales at SunnyHill Financial – and one of the top-producing originators nationwide – said he notices this becoming more of a concern for first-time borrowers who are “already saving every nickel and dime to afford a home.” Sellers are also impacted if buyers aren’t able to find affordable coverage.
G-Rate’s Wingate says rising premiums especially hurt first-time buyers because “it puts pressure on their debt-to-income ratio, you know, in terms of being approved for a loan,” adding, “and once you purchase the asset, you’re paying a higher-rate insurance premium. It doesn’t leave you much [money] to either purchase other policies to cover your assets or to do other things. So it definitely strains the wallet.”
That’s why Cooke said there needs to be a shift in consumers’ mindsets that insurance is not something they can take for granted, since “most homebuyers just wait until maybe a week or two weeks before closing” to get homeowners insurance.
Anecdotally, Hanson mentioned that his father was in the middle of purchasing a home not too long ago and “he had to find some wacky – I don’t wanna call them wacky – but he had to find a company that he was not familiar with to get it handled. He was like, ‘I didn’t even know this was a real insurance company’ because he was buying in a place where they had had fires a long time ago,” Hanson said.
“We’re bringing it up very early in the process because our clients need to know and need to understand that [they’re] not gonna have a hundred dollar insurance policy anymore.”
On the path from loan application to closing, more obstacles keep getting thrown in the way – rising credit fees, dwindling inventory, high interest rates, and now an insurance crisis.
If originators want to keep the nation’s dream of homeownership alive, or simply earn their next paycheck, they must help borrowers navigate through the mess. Hence, originators like those at SunnyHill Financial are helping clients shop around for the best deal on their insurance.
Flora said he has brought in more insurance partners to give his clients pre-negotiated rates for a better deal. Due to a non-disclosure agreement (NDA), Flora could not disclose who those partners are, but said, “It’s a couple national providers, …and [we] asked them to give us preferential margins for our clients, so that we can refer our business over to them.”
Flora also advised originators to educate their clients early on the insurance, making sure they understand what their payment is going to look like.
SunnyHill Financial Co-Founder and CEO, Tyler Flora, partners with a few national home insurers that provide preferential margins for their clients.
“We’re bringing it up very early in the process because our clients need to know and need to understand that [they’re] not gonna have a $100 insurance policy anymore,” Flora added. “But, still, we run into pockets in California, Texas, Florida, and a couple other states where it’s just unaffordable – unaffordable is not even the right word. It’s downright expensive.”
As the third-highest producing originator in California, Cooke assists borrowers in shopping for homeowners insurance by working it into conversations early in the loan process. Getting pre-approved for insurance should happen at the same time they get pre-approved for a mortgage, he said.
Still, Cooke said the insurance premiums he's seeing in 2024 are three or four times more expensive, on average, than in 2023. On a recent renewal for a client whose annual insurance payment shot up an especially high amount – from $1,100 to $9,300 in the past year – Cooke said, “I had to go to four different companies. It took me a couple days and, finally, I got it down to $3,000. But it still almost tripled.”
Industry experts like to view market challenges as a way for companies and originators to differentiate from competitors, but it’s always wise to exercise caution when stepping outside one’s area of expertise, Hanson warned.
“There’s obviously a range in the quality of, say, real estate providers or mortgage providers, just in their expertise, their problem solving, their solutioning,” Hanson said. “But the really great ones are gonna come prepared to solve other problems for their customers [other] than just the financing or the real estate questions they might have.”
However, originators shouldn’t be the only ones shouldering this responsibility for their clients, Hanson added. Real estate agents are more likely to know what insurance providers support a specific listing before it’s even put on the market. Equipping their clients with that information ensures that the entire home sale process goes smoothly, Hanson advised.
On The Brink Disaster
Homeowners and homebuyers who find themselves in home insurance deserts must turn to the FAIR Plan, which provides wildfire coverage of up to $3 million for single-family homes and up to $20 million for commercial properties. But, California’s insurer-of-last-resort is not exactly a ‘knight in shining armor’ for borrowers, given the program’s solvency issues.
Although the FAIR Plan was established by the governor’s office and state legislature more than 50 years ago, it is not a public entity controlled by taxpayers. Rather, it’s a private association run by a coalition of insurance companies. The funds are collected and pooled by all the licensed insurers in California, and each participates in the profits, losses, and expenses of the Plan in direct proportion to its market share of business written in the state.
The California FAIR Plan Association did not respond to NMP’s inquiries regarding whether or not any of the insurers withdrawing from the state have also stopped contributing to the FAIR Plan.
The FAIR Plan website emphasizes that it is “a temporary safety net” for borrowers who cannot find coverage in the traditional market. In 2020, the FAIR Plan had nearly 202,900 active policyholders. As of February 2024, the FAIR Plan has about 350,000 active policyholders, making it one of the top five insurers in California, according to its website.
The overwhelming demand means Flora and Cooke have seen significant delays when working with the FAIR Plan. In one instance, it took eight weeks to receive a quote. The delays are especially challenging for originators working in the most competitive real estate market in the country.
“You make a competitive offer to do a 21-day close, but if you can’t even get the insurance back to them in the 21 days, it can cause problems,” Flora added.
In 2023, Governor Newsom signed an executive order (N-13-23) urging Insurance Commissioner Lara to expand coverage, improve efficiency and transparency of the department’s rate approval process, tailor and revise the rate approval process established in Prop 103, and maintain the solvency by reducing overall market share and moving its customers to the traditional market.
However, testifying to the California Assembly Insurance Oversight Committee in March, the president of the FAIR Plan, Victoria Roach, said those efforts are not going according to plan.
In her testimony, Roach warned the committee of the FAIR Plan’s impending insolvency. With the number of policyholders more than doubling in the past few years, liability exposure has ballooned from $50 billion in 2018 to $336 billion in 2024. She said they’re “one event” away from a large assessment due to a lack of money on-hand and overwhelming liability exposure.
Wingate reported that G-Rate has seen a double digit increase in the number of policies being placed in the FAIR Plan compared to previous years. On top of delays, premiums are much higher, increasing 15.7%, and coverage is much more limited compared to policies offered in the traditional market.
“The FAIR Plan is covering fire only, so customers are not really getting the coverage that they need,” Wingate said. “With all the floods happening right now, they can’t go out and buy flood insurance. They can’t buy earthquake insurance. So, the customer is driven to one particular plan that only covers one particular peril.”
Wildfires, floods, earthquakes and other conditions insurers offer coverage for are called “perils,” with storms being classified as a secondary peril and fire a primary peril, he explained. “Then the agent has to find other carriers to kind of wrap around that. And we call those carriers that offer DIC, difference in conditions, to cover the other perils,” Wingate said. “And it’s very, very expensive.”
Originators can’t predict what interest rates will be later this year, but they do have more certainty about homeowners insurance rates given that Roach also told the committee, “Our rates are going to go up, no question about it.”
