State Farm joins other companies who will no longer insure new homeowner policies
TRUCKEE, Calif. — This week State Farm Insurance, the largest insurer of homes in California, announced it will no longer be writing new homeowners insurance policies in California, citing the risk of wildfire and increasing cost of construction according to officials.
State Farm said the decision is due to “historic increases in construction costs outpacing inflation, rapidly growing catastrophic exposure, and challenging reinsurance market,” according to State Farm.
This may have local homeowners and realtors concerned for property values but RE/MAX GOLD Realtor Betsy Hamilton, who serves clients throughout Nevada, Placer and Yuba counties, says there are still resources for those looking to purchase.
“Everyone can still get fire insurance,” Hamilton said. “It’s just going to be a FAIR Plan.”
Existing customers will not be affected, and State Farm will still issue auto insurance in California, according to the Insurance Information Institute.
“The FAIR Plan exists to provide insurance to Californians who cannot find coverage through no fault of their own. The FAIR Plan serves as a temporary safety net for property owners until traditional insurance coverage becomes available,” according to the FAIR Plan Property Insurance fact sheet.
“It’s necessary to take these actions now to improve the company’s financial strength,” according to information provided by Sevag Sarkissian, Media Specialist for State Farm Insurance.
“For a lot of us on acreage we have had FAIR Plan. State Farm was able to do [insurance] in certain areas such as Lake Wildwood, Lake of the Pines or downtown Grass Valley, not many,” Hamilton said. “Now there is none.”
The effect on the real estate market depends on the information buyers receive, according to Hamilton.
“85% of the buyers interested in Nevada County are coming from Southern California or the Bay Area,” Hamilton said. “They look at the homes and if they are not guided properly, and call a Bay Area representative who gives them a scary price for fire insurance or tells them they can’t get it, that is the end.”
The headlines across the state show that State Farm is just the latest move among large insurance companies to severely limit the number of policies written in California, if at all, for homeowners, according to Hamilton.
“Allstate announced it would no longer sell new homeowners insurance policies in California in 2007, a decision Allstate reversed in 2016. Allstate renewed its pause on writing new property insurance policies in late 2022,” according to the Insurance Information Institute.
State Farm cited three key reasons for taking this step, according to the Insurance Information Institute.
First, the increases in construction costs, which are far outpacing inflation.
Second, the rapidly growing catastrophe exposure, especially from wildfires.
Third a challenging reinsurance market, which reflects what insurers pay for insurance.
Reinsurance is insurance for insurance companies, according to the Insurance Information Institute.
“It’s a way of transferring some of the financial risk insurance companies assume in insuring cars, homes and businesses to another insurance company, the reinsurer,” according to the Insurance Information Institute.
“State Farm is the only insurer remaining that has not non-renewed wildfire-exposed customers since the 2017 fires. Every other insurer has. Even with this move, State Farm is continuing to renew its wildfire-exposed customers – they’re only stopping new business,” according to Rex Frazier, President Personal Insurance Federation of California.
Now that reinsurers are viewing California wildfire risk as a primary, not secondary risk [to earthquakes], it is more difficult for insurers to serve as many customers. As reinsurers have increased their prices, substantially, insurers cannot afford to pay more, according to Frazier.
“Think of it like banks, which must have a certain amount of money in hand compared to all the loans they have outstanding,” according to Frazier. “Well, what happens when an insurer has no more money to support more insurance policies in-force? They can’t write more policies, unless they raise capital.”
The net cost of reinsurance must be part of the ratemaking process. The FAIR Plan purchases reinsurance to help stabilize the market by splitting risks and to avoid an assessment on insurers. The FAIR Plan is authorized to purchase reinsurance through California codes.
“FAIR Plan rates are usually higher because it covers a higher concentration of high-risk properties,” according to the Fair Plan fact sheet.
Visit CFPNET.com to learn more about the FAIR Plan.
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