Homeowners Insurance in California

Homeowners Insurance in California: Navigating the Turbulent Landscape

As a homeowner in California, you likely know that navigating the world of homeowners insurance is daunting. The Golden State’s unique challenges have made the insurance landscape increasingly complex. From climate change to wild fires and flooding, we are at the mercy of mother nature, insurance lobbyists, and state politicians.

We’ll explore the current state of homeowners insurance in California, the factors driving the changes, and the steps you can take to protect your most valuable asset.

The Regulatory Landscape: Proposition 103 and Its Impact

Reform measure, Proposition 103, passed in California in 1988. It has had a lasting impact on the state’s insurance landscape. The legislation was intended to protect consumers from excessive rate hikes. However, it has also created challenges that the industry and regulators grapple with today.

Proposition 103 set strict guidelines for the way in which insurance rates can be calculated and adjusted.  It forced insurance companies to calculate increases based on previous losses. They could no longer use predicted future losses. Meaning insurance companies cannot adjust pricing based on the increasing frequency and severity of natural disasters.

However, insurance companies are actively working to change this. They continuously lobby for the ability to incorporate these emerging risks into their rate calculations. This ongoing battle between regulators and the insurance industry has created a complex and often unpredictable environment for homeowners. Insurers argue that they need more flexibility to accurately price their products and remain financially stable. Consumer advocates counter that Proposition 103 is essential for protecting policyholders from excessive rate hikes.

The impact of Proposition 103 has been significant. The legislation has been credited with saving California consumers billions of dollars in insurance premiums over the past three decades. At the same time, the debate over the appropriate balance between consumer protection and industry needs continues to evolve.

As an example, State Farm insures one in five homes. Their financial solvency is precarious to say the least.
April of 2023, for every dollar State Farm paid out to insureds, they took in 78 cents.
By May, when they stopped accepting new applications, it was 73 cents per dollar.
March of 2024, 48 cents.

The Squeeze on Insurers: Losses, Lawsuits, and Paused Policies

In recent years, insurance companies have faced mounting challenges in California. Even though we have significantly fewer environmental claims than other parts of the country.  Jaymi Wessell, a Pacifica State Farm agent, tells us that California insurance is 30% cheaper because of limited natural disasters. Catastrophic events nationwide like wildfires and floods have resulted in staggering losses. Those losses have put a significant strain on the industry. 

Additionally, issues surrounding tenant rights and squatters lawsuits have further exacerbated the situation. All of these factors have made it increasingly difficult for insurers to operate profitably in the state. 

The Cost of Coverage: Skyrocketing Premiums and Dwindling Options

As a result of these industry-wide pressures, homeowners in California are facing a stark reality: the cost of homeowners insurance is skyrocketing. And the options for coverage are dwindling.

The impact has been particularly severe for apartment owners. Rates have seen a staggering 300% increase. This has led some property owners to reevaluate the viability of their investments. Some are unable to afford the escalating premiums. For those who have held onto their properties, the costs will be passed on to their tenants.

The Importance of Credit Scores for Insurance Companies and Specialty Policies

Fannie Mae, a major player in the mortgage market, requires insurance companies to be rated “B” or better in order to qualify for their lending programs. This means that if an insurance company’s credit score is lowered, homeowners may be forced to seek alternative insurance solutions. The California Fair Plan is an option. However, it poses its own set of challenges: It does not provide liability coverage. Thus, homeowners who rely on this plan will need to obtain an additional Difference in Conditions (DIC) policy to fill the coverage gap.

Jaymi Wessell says, “It is also important to note: It’s possible a lenders’ potential refusal of underrated insurance companies could result in “forced-placed insurance” as the policy comes up for renewal. This means that the insured would be obligated to either accept the policy the lender purchased and will charge the policyholder for, usually at a much higher premium than they were formerly paying, or the insured is free to try to obtain other affordable coverage on their own.”

Fannie Mae

Fannie Mae is a government-sponsored enterprise (GSE) that was established in 1938. It was designed to provide liquidity, stability, and affordability to the U.S. mortgage market. Fannie Mae’s primary role is to purchase and securitize mortgages. The liquidity provided by this process enables lenders to sell their loans to Fannie, get the money back and then loan those funds to other home buyers.  

By guaranteeing mortgage-backed securities, Fannie Mae helps to ensure a steady flow of affordable mortgages throughout the country, even in times of economic stress. As of 2022, Fannie Mae and Freddie Mac together own or guarantee 56% of the single-family mortgage debt in the United States.

The Rise of Drone Surveillance and Underwriting

Insurance companies have turned to a new tool in their arsenal: drones. These aerial vehicles are being used to conduct stealth inspections of homes. Initially, there was a particular focus on roofs. Now, however, the inspections include more findings. Policies are being canceled for various infractions found during the air-borne inspections. Cancellation due to the presence of a “protection dog” in the backyard.  Excessive brush around the perimeter of the home is another cause for cancellation. We can expect more of this to come. 

As insurers continue to tighten their requirements, homeowners must be vigilant in meeting expectations to avoid potential coverage issues.

The Ripple Effects: Impacts on Homeowners Associations and Flood Insurance

The challenges facing the homeowners insurance industry in California are not limited to individual owners. The crisis is also having a ripple effect on other aspects of real estate, such as homeowners associations (HOAs).

Many HOAs are struggling to secure adequate coverage, leading some to consider converting to a Tenancy in Common (TIC) structure. This shift would require individual owners to obtain their own insurance policies, adding another layer of complexity and cost.

Additionally, the need for flood insurance has become increasingly pressing, particularly in areas prone to flooding. Jaymi advises homeowners to obtain new flood insurance quotes. The market for this coverage has evolved, with “after-market” options.  These opportunities may provide more affordable solutions.

The Future of Homeowners Insurance in California

As the homeowners insurance landscape in California continues to evolve, it’s clear that homeowners must remain vigilant and proactive in protecting their investments. Staying informed about the latest industry trends, regulatory changes, and available coverage options is crucial.

Homeowners should work closely with their insurance agents and the California Department of Insurance to ensure they are making informed decisions and taking the necessary steps to safeguard their homes.

Filing complaints with the Department of Insurance can be an effective way to address coverage issues or difficulties in obtaining insurance.

In the end, the management of real estate in California is increasingly intertwined with the complexities of the homeowners insurance industry.  Homeowners can better protect their most valuable asset and ensure their financial security by understanding the challenges and navigating the evolving homeowner insurance landscape.

Jaymi Wessell, Agent
Lic. #0J01106
108 Manor Dr.
Pacifica, CA 94044
Tel 650.755.5600