The Insurance Information Institute (III), a New York-based industry association, has reported that homeowners insurance providers in California continue to grapple with the financial aftermath of the costly wildfires of 2017 and 2018. According to III, California regulations compel insurers to depend on historical data when determining risk costs.
In a brief released in September, III asserted that for insurance coverage to be underwritten and priced accurately, "insurers must be able to set premium rates prospectively," as per a press release. However, due to California's Proposition 103, which voters approved in 1988, insurers in the state are unable to price risk prospectively. The brief further noted that "One or two years that include major catastrophes can wipe out several years of underwriting profits—thereby contributing to the depletion of policyholder surplus if rates are not raised."
According to III, California experienced the three most expensive wildfires in U.S. insurance history in 2017 and 2018: the Tubbs Fire, the Camp Fire, and the Woolsey Fire. The state's homeowners insurance providers collectively paid out more than twice as much as they collected in premiums during those years. III maintains that the costliness of these fires continues to impact the California insurance market today.
As reported by Kiplinger, major insurance providers are restricting coverage in California or leaving the state entirely, with some citing wildfires as a factor in their decision. State Farm and Allstate both announced last year that they would cease writing new policies for Californians. State Farm attributed this decision to "historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market."
III pointed out that as Californians are left with fewer private insurance options, more are turning to the state's Fair Access to Insurance Requirements (FAIR) plan. According to III, FAIR offers less coverage for higher prices. III emphasized that California "needs to update its regulatory regime to allow accurate, prospective pricing."
The III's website reveals that more than 50 insurance companies are members of the association. The association provides research reports, white papers, and other resources aimed at enhancing knowledge of the insurance industry. The III is affiliated with The Institutes Risk and Insurance Knowledge Group.