Sorry, neighbor, you’re on your own: Insurers alter policies in face of more natural disasters

Wildfires, unrelenting storms and the ballooning costs of rebuilding weather-damaged property are straining the nation’s property insurers, forcing customers to confront dwindling options and higher premiums.

The State Farm General Insurance Co. recently stopped accepting new applications for business and personal lines of property and casualty insurance in California. Allstate quit writing new policies in the wildfire-prone state last year.

The number of Louisiana owners on the “Citizens” plan — an option of last resort with high prices — swelled from about 36,000 before Hurricane Laura hit in 2020 to about 130,000 today, reflecting the dearth of standard-market options. Rates rose by 6.8% in 2021 and 18.5% in 2022 compared to average yearly increases of less than 2% from 2015 to 2020.

“Huge pressure. Huge,” Louisiana Insurance Commissioner Jim Donelon told The Washington Times. “I’m hearing a lot of folks saying they’re really just going to have to consider relocating out of Louisiana.”

The insurance industry is being socked by a triple whammy of natural disasters, likely fueled by climate change; rising constructions costs that can exceed inflation; and costlier reinsurance, a kind of insurance for insurers that stabilizes the market by spreading out risk to protect companies when they face unusually high claims.

Those factors are “converging to put upward pressure on property-casualty insurance premium rates across the United States. Florida, Louisiana and, most recently, California, have been directly impacted,” said Janet Ruiz, a California spokeswoman for the Insurance Information Institute.

ValuePenguin, which tracks the issue, said in a recent study that homeowners’ insurance premiums are up 2.8% on average in the U.S.in 2023, a smaller increase than the 4.9% jump in 2022 but part of a steady upward climb, with rates increasing by a cumulative 19% in the five years since 2018. Nearly 120 natural disasters caused $99 billion in insured losses in 2022.

The toll from natural disasters is mounting at an alarming clip. Texas and other places are seeing extreme winter weather events and tornadoes that are swirling out of their normal season.

President Biden last week said in the last year alone, hurricanes and other extreme weather events in the U.S. caused over $165 billion in damage.  

“Three hurricanes — Fiona, Ian and Nicole — made landfall and did damage across half a dozen states,” he said after a briefing on summer hazards. “This year alone, wildfires have destroyed an area almost as big as the state of Maryland.”

Wildfires and onerous rules are putting the squeeze on insurers in California, forcing companies to rethink their lines of business there.

State Farm said it decided to stop writing new policies “due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market.”

The decision does not apply to car insurance or existing customers in the affected lines of insurance, but it was a major move. State Farm is the largest supplier of homeowner insurance in California, the nation’s most populous state.

State Farm acknowledged Sacramento’s efforts to mitigate the risks from wildfires and said it would work constructively with state officials to “help build market capacity in California.”

“However, it’s necessary to take these actions now to improve the company’s financial strength. We will continue to evaluate our approach based on changing market conditions,” the company said.

Ms. Ruiz said California insurers have lost 20 years’ worth of underwriting profits in the last six years because of extreme wildfires.

“We’re seeing companies all evaluating how much insurance they can offer in California, and they’re taking different types of actions,” she said.

Some are not writing new policies, while others are not renewing high-risk properties and generally reducing their business in California. Allstate stopped issuing new policies there last year.

“We paused new homeowners, condo and commercial insurance policies in California last year so we can continue to protect current customers,” said Allstate spokeswoman Brittany Nash. “The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums.”

Rex Frazier, president of the Personal Insurance Federation of California, said inflation is driving up the cost of home reconstruction so insurers have done what other businesses are doing — raising prices to cover their high costs. However, under a 1988 law, insurers in California must apply to receive prior approval for rate hikes based on a complicated formula.

“Obviously in times of rapid inflation like today, it is difficult to operate a business when underlying costs are rising significantly but it takes six months or more to raise rates through the state approval process,” Mr. Frazier said.

The state also requires insurers to price wildfire risk based on losses over the last 20 years.

“We don’t think this makes any sense because today’s climate is very different than 20 years ago,” Mr. Frazier said. “Why wouldn’t California regulations allow an insurer to use forward-looking climate models to project their future losses, rather than historical experience over the last 20 years?”

The situation is putting a burden on the FAIR Plan, an option that offers bare-bones coverage at high rates, with enrollment surging 70% since 2019, to 272,846 homes in 2022, according to The Los Angeles Times. The paper reported that real estate deals in the San Francisco area are falling through because some people cannot get insurance.

California is taking steps to correct its course. Gov. Gavin Newsom and the state insurance department introduced the Safer from Wildfires program that offers homeowners discounts on insurance if they take steps to protect their homes from fires, such as replacing greenery or wood chips with stone within 5 feet of the home.

Also, lawmakers are starting to take a second look at stringent rules that keep California premiums below market rates. The average annual premium for homeowners in California is $1,300 while it is about $4,000 in Florida and about $2,000 in other states prone to wildfires, according to the Insurance Information Institute.

“Until insurers are allowed to charge actuarially fair premiums, this trend will continue. It’s not that insurers are greedy; they have to look out for their shareholders and their policyholders. If insurers go bust, it’s bad news for everyone,” said Tom Corringham, a research economist at Scripps Institution of Oceanography. “The policy challenge is to ensure that markets are sending the right price signals to homeowners and prospective buyers while at the same time keeping insurance available and affordable.

In Florida, the state legislature met in a special session last year and passed two bills, signed into law by Gov. Ron DeSantis — who is now a presidential candidate — to stabilize an insurance market that had been spiraling out of control because of roof-replacement insurance scams and repeated hurricanes.

“Insurance companies have been leaving the state because of an inability to make a profit,” said Susan MacManus, a political science professor emerita at the University of South Florida.

The new laws make it harder for insurance companies to deny coverage for homeowners with undamaged roofs up to 15 years old and limit attorney fees that are fueling insurance scam lawsuits. The state also provided $2 billion to shore up insurance companies for hurricane losses and requires them to lower rates if they accept state help.

Louisiana is trying to upgrade homes so they are more resistant to hurricanes. 

“What we have to do first and foremost, is put stronger roofs on our buildings in Louisiana,” Mr. Donelon said.

Louisiana last year passed a “fortified roof” program that mimics an Alabama program. In some cases, experts say parts of the country might need to be off-limits for new construction.

“We must stop building new properties or communities in areas prone to climate-induced disasters, including flooding, wildfires, water scarcity or dangerous heat waves,” Mr. Corringham said. “It’s challenging to convince people to move when danger isn’t immediately apparent, so we must leverage the next natural disaster with buyout programs rather than subsidies to rebuild.”

Mr. Donelon said there is no question that many Louisianans are considering an exit. He wants to avoid an exodus.

“We can’t afford that and frankly, America cannot afford that,” he said. “Our economy and lifestyle require us to be working in the oil fields, the chemical plants, in the refineries, in the ports.”

• Susan Ferrechio contributed to this story.