California – Homeowners Insurance Premium Rising?
Subsequent to the horrific 2017 wildfires in California, homeowners are finding it increasingly challenging to find reasonable home insurance. In some areas, insurers are now declining to insure homes leaving homeowners to the option of going to Substandard Carriers or the California Fair Plan for much less than desirable coverage at an exorbitantly higher premium.
Insurance carriers purchase re-insurance policies offering protection from catastrophic loss; the industry is a large risk pool where participants pool premium to pay for claims therefore spreading the risk from a single home to a large number of homes. In the case of major losses such as wildfires, the premium pool is simply not enough.
Insurance companies are required to maintain reserves in order to secure the interest of insured homeowners; major catastrophic losses diminish the reserves therefore requiring carriers to increase premium to replenish the pool of funds. Against popular belief, States publish a very small allowable percentage of underwriting gain to be made by carriers; the annual operating income of carriers is so small that the carriers have to rely on income from other sources to build their empire.
In fact, as of recent years, underwriting gains have become underwriting losses, premium growth has shrunk and investment yields have been minimal for years. In short, the property and casualty industry is facing difficult times. Since the insurance industry is State regulated, accounting is handled on a State by State basis; each State has its separate risk factors and premium is accordingly calculated by actuarial firms hired by the insurance carriers.
A recent survey of property insurers has shown a large increase of non-renewals over the past 2 years. In areas of concern where non-renewals haven’t been enforced, premium has risen up to 3 and 4 times over the prior year. In some cases, one insurance company will non-renew a home and another may allow the territory or risk but at a sharp increase in premium. Also following the wildfires, we have witnessed the cost of construction soaring as the demand increases for construction work.
While homeowners are calling their carriers and the Department of Insurance asking for answers as to why the sharp premium increases, the most impacted consumers are those who may no longer be insurable. Summarizing the 2017 year, the deadliest fires in October destroyed more than 14,700 homes and 731 businesses causing more than $9 Billion in damages as well as multiple deaths.