With soaring rates, dropped coverage, insurance crisis deepens in California

SACRAMENTO, United States, July 23 (Xinhua) -- The insurance crisis gripping California and other U.S. states is intensifying, with homeowners and small businesses facing soaring premiums and vanishing coverage options.

Insurance premiums are rising in the United States, particularly in California, resulting in spiked prices and reduced availability of insurance policies. While climate change-related risks, particularly wildfires, are the primary reason for the increasing insurance cost, urban businesses in California are also feeling the pinch.

Allstate, an insurance company that stopped issuing new California homeowners insurance policies in 2022, is seeking an increase in its California homeowners insurance premiums by an average of 34 percent, Insurance Journal reported Tuesday, adding that it would be the "largest rate increase this year" and would impact more than 350,000 policyholders.

Laurie Thomas, owner of two restaurants in San Francisco, faced a 35-percent premium increase this year, the largest she's ever seen. She told the San Francisco Chronicle last week that she had to cut staff due to rising costs and slower business.

In downtown Oakland, Nenna Joiner, owner of a bar, experienced this crisis firsthand when her insurance coverage was canceled due to a high "crime score" for her ZIP code despite no criminal incidents at her business.

Joiner expressed frustration to the San Francisco Chronicle that her business was penalized for area-wide statistics rather than her establishment's actual history.

State Farm, one of the largest U.S. insurance companies, applied for large rate increases in California on Thursday. The latest move requested a 30 percent rate increase for its homeowners line, a 52 percent rate increase for renters, and a 36 percent rate increase for condo coverage.

This is the third major rate change for State Farm in California within the last year. It stopped selling insurance for new homes in the state in 2023, citing wildfire risks and skyrocketing construction costs.

The situation is pushing more people to government-provided insurance as the only option. In California, the number of commercial policies under the California Fair Access to Insurance Requirements (FAIR) plan, the last resort for those unable to obtain coverage in the private insurance market, more than doubled from September 2019 to March 2024.

California has adopted price regulations that limit how much an insurance firm can raise its rates without a public hearing while considering requiring insurers to maintain coverage in high-risk areas as well. However, the long-term outlook remains uncertain as the industry continues to adapt to evolving climate risks and regulatory landscapes.

The trends are not unique to California.

Last year, two of the 10 largest homeowners' insurance companies, USAA and Farmers, increased the rate by nearly 15 percent in many states, according to S&P Global. The other eight largest companies increased rates by 6 to 10 percent.

Across the country, U.S. homeowner's insurance premiums increased by more than 20 percent since 2023, while major insurance groups are pausing the writing of new policies in some areas, or pulling out of the market entirely, according to Meredith Fowlie, a professor of agricultural and resource economics at University of California, Berkeley.

Aside from extreme weather events, other factors contributing to the insurance price hikes included inflation in construction costs and increases in non-catastrophe losses and liability claims, said Fowlie, co-author of a new study published by the National Bureau of Economic Research last month.

The study, examining the relationship between wildfire risk and insurance prices in California, has revealed a hidden factor exacerbating the situation -- an economic phenomenon known as the "winner's curse."

A company that is pricing at a coarser level, such as by ZIP code, might worry that it is only getting business from the higher-risk homes that competitors using more granular, property-specific assessments are less excited about insuring, thus it might reasonably raise prices to insure against this potential risk, Fowlie explained.

The study suggested that regulatory reforms could help address the problem. Making it easier for all firms in the market to access more granular, more sophisticated wildfire risk estimates could help improve both the availability and affordability of insurance, Fowlie noted.