Farmers Insurance has become the latest major US insurance carrier to announce it is easing-back somewhat from writing property business in California, saying it will cap the number of new policies written each month now.
Farmers said it will aim to keep its exposure consistent with levels it would have projected before the recent market issues in California, suggesting it does not have any ambitions to take advantage of other carriers exits from the state.
Recall that Allstate had paused underwriting new homeowners, apartment and commercial property insurance in California in late 2022, while both AIG and Chubb are reported to have pulled-back on high-value property risks in the state.
More recently, State Farm said it was exiting the California property insurance market, ceasing to write business and personal P&C property as it cites exposure growth, rising catastrophe risks and reinsurance market challenges as reasons for the move.
Farmers Insurance has cited similar issues as State Farm, saying that writing business in California is fraught with challenges related to severe weather loss events, inflation and soaring reconstruction cost values.
The San Francisco Chronicle reported that a spokesperson for the California Department of Insurance played down the most recent Farmers news, saying, “The Department of Insurance understands Farmers has been writing 7,000 monthly new homeowners policies on average. So this is not a departure. We do not expect their footprint in the state to change significantly one way or another. By maintaining its historic average of new homeowners policies in California, Farmers is showing its continued commitment to the Golden State for the long haul.”
Of course, if Farmers intention is to maintain its exposure in California, but not to grow it, that could mean fewer policies written over time, given the inflationary effects it is feeling.
Wildfire risk and climate change are the two factors most reported in relation to insurers.
However, carriers might tell you that it is their inability to raise rates sufficiently to cover the expected losses of their portfolios that is the biggest challenge they currently face.
David A. Sampson, president and CEO of the American Property Casualty Insurance Association (APCIA) explained an industry-view of the issue.
“Insurers do not want to retrench from one of the nation’s most important markets, but cannot continue to operate and protect policyholders when insurers are struggling to secure an adequate rate and manage their risk exposure,” Sampson explained.
Adding that, “The California Department of Insurance has recently recognized the need for rates to start catching up with actual and future risk, but the problems with the underlying, outdated regulatory scheme create larger challenges. Meanwhile, other factors collided that have led to the implosion of the California insurance market, including: one of the most prolonged and severe droughts in the West in recorded history, amplified by climate factors; historic wildfires in 2017, 2018, and 2020; four-decade high inflation and supply-chain disruption; and legal system abuse.
“Insurers understand that homeowners are struggling right now. Insurance affordability and availability have a very real impact on families, individuals, business owners, and communities. That’s why we are advocating for solutions.”
The APCIA is calling for:
- Allowing the use of forward-looking catastrophe modeling in rate filings.
- Allowing the use of reinsurance in ratemaking.
- Reforming the rate filing process more broadly, to complete reviews within statutory timeframes.
- Reforming the California FAIR Plan assessment process to reduce exposure to the shrinking number of private insurers remaining in the marketplace; and
- Advocating for expanded wildfire mitigation to reduce the risk and make coverage more available in high-risk areas.
Sampson stated that regulatory change is required, “California’s regulatory framework (i.e., Proposition 103) is 35 years old and is ill-equipped to handle the increasing challenges wrought by climate change, and is resulting in the insurance market upheaval California faces today. It is time to modernize Proposition 103.”
The issue of being able to charge a risk-commensurate price for property insurance is rearing its head across the United States and other parts of the world.
Carriers, like reinsurance capital providers and ILS funds, need to deploy capital at rates that allow them to cover their loss costs, costs-of-capital, expenses and provide for a margin over the longer-term and it appears California is a market where they are struggling to do so.
In softer reinsurance markets we might have seen carriers leaning on reinsurance capital to support their capacity needs, in a region exposed to a major catastrophe peril.
But after the severe wildfire seasons of the last few years and now in a hard reinsurance market, that is not even an option, as carriers must have the capital to retain the risk that reinsurers want to see them holding.
We’re now at a time where some analysts believe primary carriers will bear significantly more of the catastrophe losses that they had previously been ceding to their reinsurance partners, while for the smaller to mid-sized catastrophe losses and frequency severe weather events reinsurers can now expect to take fewer losses, all thanks to the restructuring of programs, tightening of terms and raising of attachments.
Regulatory change to allow for risk-commensurate rates to be charged will help and could unlock greater quantities of reinsurance capital to support the better-functioning of California’s insurance market. Change may take time though, so it could be a difficult few years ahead for insurance buyers in the state.