After wildfires, rising insurance costs cause California homeowners to feel the heat

How did the California insurance market get to this point?

A 1988 law called Proposition 103 has artificially kept insurance premiums low, according to Mark Friedlander, national director of corporate communications at Insurance Information Institute, a nonprofit that studies the insurance industry.

The proposition aims to protect consumers by requiring insurers to obtain approval before they can increase insurance rates. It also mostly bars the use of forward-looking “catastrophe models,” forcing companies to rely on historical data alone to assess the homeowners’ risk - an unideal scenario for insurance companies today facing an evolving risk outlook from a changing climate.

Why have California insurers left the market in recent years?

Insurers are still recovering from the 2017 and 2018 wildfire seasons in California, which devastated the financial equilibrium of the insurance market.

As the total number of damaged homes from environmental disasters has risen, insurance companies are facing rising labor and supply costs that increase the cost of rebuilding damaged homes.

With higher environmental risk and an inability to raise insurance premiums because of Proposition 103, seven of California’s largest insurance companies, including AllState and State Farm, have reduced or stopped writing new insurance policies altogether since 2022.

How does the California Department of Insurance plan to address the issues in the insurance market?

CDI is pursuing a package of reforms in their Sustainable Insurance Strategy, which they plan to finalize by the end of the year. The plan contains several pillars.

First, the proposed reforms would accelerate the process by which insurance companies can get state approval for increases to insurance premiums. The reforms would also allow insurers to factor in the cost of “reinsurance” – essentially insurance for insurers – into requests for rate hikes. Reinsurance costs have risen due to inflationary pressures in recent years.

Additionally, the reforms would permit insurers to use forward-looking “catastrophe modeling” so they can more accurately assess their risk outlook.

The aim of CDI’s reforms is to entice insurers to return to the California insurance market.

Read on to find out homeowners are facing the challenges in the insurance market, what they are doing to protect their homes, and how higher insurance costs could impact the housing market.

The California Department of Insurance (CDI) has taken a step toward increasing home insurance availability in areas with high wildfire risk.

CDI announced on Thursday they submitted a new regulation for approval that will allow insurers to use forward-looking “catastrophe models” that will improve insurers’ ability to assess risk and price policies more accurately. As a condition of the use of the model, insurers will be required to increase their insurance coverage in high-risk areas.

“Consumers want solutions to our state’s insurance crisis. My new regulation will make insurance more available across the state,” said CDI Commissioner Ricardo Lara in a press release.

If approved by the Office of Administrative Law, the regulation will be implemented by the end of December and consumers could begin to feel relief by the middle of next year, according to CDI spokesperson Michael Soller.

The new regulation is part of a package of reforms CDI is pursuing called the Sustainable Insurance Strategy which the regulator hopes will entice insurers back to the market after seven of the state’s largest home insurers have curbed or halted policies since 2022. The decreased number of insurers in the state has driven up the cost of insurance premiums and made it difficult for homeowners to obtain coverage in some parts of the state with high environmental risk.

Insurers are recalibrating the cost of environmental risk in California after a series of devastating wildfires in the last few years. According to Mark Friedlander, national director of corporate communications at Insurance Information Institute, insurers have stopped doing business in the state because state regulation prevents them from charging rates that reflect the risk environment.

“California residents pay among the lowest rates in the country with very high risk,” Friedlander said. “It just doesn't add up. It’s two plus two equals six.”

CDI is currently pursuing a swath of reforms called the Sustainable Insurance Strategy which they hope will entice insurers back to the market and make insurance policies more affordable for consumers.

Friedlander expects the regulations to set the insurance market on the path to financial stability. Allstate, which stopped writing new insurance policies in late 2022, has said they would resume issuing policies once the reforms are implemented.

Still, the regulations will take time to take effect. In the last few years, homeowners have faced insurance bills that have doubled or troubled in cost as their insurance policies have been discontinued.
An increasing number of California homeowners are unable to find a private insurer at all, and must get coverage through the California FAIR program, the state’s insurer of last resort. Critics of the FAIR plan say that the plan is more costly for less coverage. For many Californians, however, the FAIR plan is their only coverage option, and the number of FAIR plan policies in force has more than doubled in the last five years.

By Hannah Bensen

Top photos: Homes in Palo Alto, CA (Hannah Bensen/Peninsula Press). Bottom photos: House fires. Left: iStock.com/Animaflora. Middle: iStock.com/Mattias Bokinge. Right: iStock.com/StanRohrer

Homeowners hardening properties to reduce fire risk

In August 2020, Brian Storm watched from his home in the Santa Cruz Mountains as a wildfire consumed a distant ridgeline. He told his kids – then ages 10 and 8 – to pack their belongings.

The packing exercise ended up being a test run, and Storm’s house remained undamaged in the fire – the CZU Lightning Complex fire, which damaged 697 homes in her county alone. Storm’s homeowners’ insurance bill, however, has tripled after State Farm discontinued his policy after the fire. He is now insured by Guard, another private insurer.

After the fire, Storm removed 150 trees from his property, removed vegetation from around his house, and improved his housing vents.

This is Lillian MacMinn’s home in Santa Cruz County, which she evacuated for ten days during the CZU fire.

Though her home was undamaged, her long-time insurer State Farm informed her in June that her policy would not be renewed, effective in September. MacMinn said the FAIR plan was her only option available to her, and her insurance bill has since doubled.

In the aftermath of the fire, MacMinn has implemented extensive fire hardening measures on her home including a fire-rated roof, fire resistant vents, and a five-foot ember resistant buffer zone around her house.

With the home upgrades, MacMinn has secured insurance discounts through the FAIR plan. The discounts are part of a policy from some insurers which offers rate reductions to homeowners who reduce fire risk for their immediate surroundings – by clearing vegetation, among other measures – and to their housing structure. MacMinn has qualified for 5% discounts in both categories.

Communities becoming Firewise

MacMinn is also organizing neighborhood efforts to gain Firewise certification. Firewise is a program that encourages communities to take collective action to reduce fire risk. Some insurers, including FAIR, offer insurance discounts of up to 10-15 percent for neighborhoods who gain the certification.

To qualify, neighborhoods must complete a series of steps which includes forming a steering committee to drive the efforts, circulating a voluntary risk assessment form, and holding educational outreach events for neighbors on home hardening techniques.

Snippet from flier explaining Firewise certification process. (Photo/Lillian MacMinn)

Above: Lillian MacMinn's home and fire-rated roof in Santa Cruz County. (Photos/Lillian MacMinn)

This is Amy Winkler’s home, who lives in the Santa Cruz Mountains. Winkler is spearheading Firewise efforts in her neighborhood.

Firewise requires at least eight contiguous properties to participate. Though interest from neighbors was modest at first, Winkler said, a small shed fire in her neighborhood spurred participation in the group. Winkler has since gotten 79 neighbors on board with the plan.

In the voluntary risk assessment form that Winkler circulated to her neighbors, about 25 respondents indicated they have spent a cumulative $130,000 on fire hardening measures in 2024 alone.

Winkler’s group submitted their application to Firewise on Oct. 31 and are waiting to hear if they received certification.

For Winkler, the Firewise initiative is about saving lives, preserving property, and being good stewards like the indigenous people who managed their environment for thousands of years.

“As people, we can have this symbiotic relationship with our forest,” Winkler said. “The more we can do things like clear brush and eliminate ladder fuels, the less intense and severe the wildfires are going to be."

The devastating impact of the 2018 Paradise wildfire, which killed 85 people and destroyed 18,000 structures, inspired one California engineer to create a fire-proofing innovation that could mitigate future wildfire damage and provide steep discounts to homeowners’ insurance bills.

Manmohan Mahal is the founder of SIDCO homes, a design and construction company that builds net zero, fire-retardant homes. Mahal said that SIDCO’s patented fire-retardant plywood paneling can withstand extreme wildfire temperatures. The home’s other fire-proofing features include an indoor sprinkler system and an air-tight seals that prevent the home from catching fire.

In addition to being fire retardant, SIDCO properties are passive-inspired homes, meaning they are designed to use natural influences – such as sunshine, shading, and ventilation – to reduce energy and water use. The insulation of SIDCO’s Palo Alto home, located next to the Caltrain tracks, makes the noise of the train nearly undetectable.

Wildfires spark technology innovation

Above photos: Front and back deck of Amy Winkler's home in the Stanta Cruz Mountains. (Photo/Amy Winkler)

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Impact of rising insurance premiums on housing market

Difficulties obtaining insurance may pose an additional hurdle to the homebuying and home selling process in a state already experiencing a large housing shortage.

A survey from the California Association of Realtors found that 13% of real estate agents in the state had seen a proposed housing sale fall out of escrow – meaning a sales transaction voided – because of a failure to secure housing insurance. A lack of available insurance was the reason for the failed transaction in three-quarters of these cases.

Insurance challenges in California could also increase the number of all-cash buyers which currently constitutes a quarter of the state’s housing transactions, said Oscar Wei, deputy chief economist of the California Association of Realtors. Home insurance is a requirement of mortgage contracts, meaning cash-only payments – an option only available to high-income households – can circumvent the requirement.

Despite rising costs, though, insurance premiums comprise a relatively small portion of homeowners’ total mortgage payment.

“Buyers [have] encountered difficulties in obtaining insurance,” Wei said. “That doesn't necessarily mean that they are not buying.”

Still, higher insurance premiums are a symptom of heightened environmental risk, which could impact housing valuations and migration patterns in the years to come.

“I think the bigger risk from climate is not necessarily the damage from the storms,” said Sam Khater, chief economist of FreddieMac. “It's the second order effects like people leaving because of it. And the concern is what if this happens en masse and it sparks a big migration.”

Interior design, Living room, Property, Plant, Furniture, Houseplant, Comfort, Couch, Flowerpot, Wood

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Top: Outside of SIDCO home in Palo Alto, CA. Left: Living room of home. Center: SIDCO founder Manmohan Mahal poses for photo on back deck. Right: Bedroom of home. (Hannah Bensen/Peninsula Press)

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Below: Homes in Palo Alto and San Francisco, CA. (Hannah Bensen/Peninsula Press)