The devastating wildfires that ravaged Pacific Palisades and other Los Angeles neighborhoods in January have left many residents without homes. As property owners begin the difficult process of moving forward, one topic that will surely be on their minds is insurance—whether their homes were adequately insured and whether it will be tough to obtain coverage in the future.
The homeowner’s insurance market has faced significant challenges over the past several years, with more extreme weather events resulting in record-breaking claims that drove up premiums and reduced availability. While the California market will remain especially difficult, the LA wildfires will impact the future of homeowner’s insurance across the US.
In 2023, major insurers like State Farm and Allstate stopped writing new homeowner’s policies in high-risk areas such as California, due to regulatory constraints that prevented them from pricing policies appropriately. As a for-profit business, an insurance company won’t operate in a market if it can’t charge premiums that are sufficient to cover their costs, including anticipated claims.
More recently the tide began to shift, as California officials took actions to stabilize the homeowner’s insurance market. In fact, the wildfires came on the heels of a landmark regulation announced by the state insurance commissioner just weeks before, requiring insurers that operate in the state to increase coverage in high-risk areas and provide residents with more options amidst the rise in climate change. The regulation also allows insurers to factor the impact of reinsurance costs into their rates and to model catastrophic risk.
Steps like these were expected to encourage insurers to re-enter the state. But given the widespread destruction caused by the LA wildfires (which industry experts believe could be the costliest such event in US history), carriers are likely to pause their plans and take a wait-and-see approach. Other insurers might opt to exit the market. In either case, it could become even more challenging to obtain homeowner’s insurance in California than it already was.
Though the LA wildfires focused attention on California, property owners in Louisiana, Texas, and states along the Atlantic coast also find it tough to obtain sufficient insurance at reasonable rates. Fortunately, in the wake of a major event like a massive wildfire or catastrophic hurricane, the insurance industry finds ways to adapt to the evolving landscape.
One change we anticipate is a pivot to the non-admitted market in high-risk regions. Unlike traditional policies, companies that write non-admitted policies have the latitude to customize coverage to the individual property’s specific risks and set the premium accordingly. A non-admitted policy is likely to cover only certain perils, and the costs can be quite high. But it’s often a better alternative to the bare-bones coverage offered by state-run insurance pools like the FAIR Plan, available in California, Florida, and other areas.
We also expect to see more exclusions and limitations on homeowner’s policies in distressed markets. In California and other states prone to wildfires, insurers are likely to begin excluding this exposure. In areas susceptible to hurricanes and tropical storms, it will be common to see water damage limits of only $50,000 or $100,000 on multi-million dollar homes. Deductibles are likely to rise significantly, placing homeowners at risk of high out-of-pocket costs.
Homeowners with a mortgage face an additional quandary, as they still need to satisfy the lender’s insurance requirements. Most mortgage lenders are relatively rigid when it comes to insurance, requiring lower deductibles and higher limits than many insurers offer. Over time, we hope to see a better understanding of the realities of this volatile market and more flexibility in lender requirements. For instance, as non-admitted policies become more common, lenders should be prepared to accept them as fulfilling contractual obligations.
Finally, we hope to see legislators take a more flexible, agile approach to evaluating and revising insurance regulations to stabilize tough markets. The process for adjusting rates has historically been long and arduous, making it difficult to respond to changing conditions. Events like the LA wildfires underscore the need for a more effective approach that better serves consumers.
The process of buying homeowner’s insurance is also going to change. Today, many consumers purchase a policy directly from an insurance company online. However, non-admitted policies are not available on a direct basis. The only way to access these unique offerings is through an independent insurance broker.
An independent insurance broker or advisor works on behalf of its clients and is not tied to any one insurance company. They take the time to understand your specific needs, contact various carriers, and evaluate and negotiate different options that will best protect your assets and reduce your risk. An independent broker can also advise you on what to consider when purchasing property in a difficult market. (For more details on how independent insurance advisors operate and what to look for when choosing a partner, view our guide: Everything You Need to Know About Independent Insurance Advisors.)
The personal insurance specialists at B. F. Saul Insurance understand the complexities of a volatile homeowner’s market. And as a highly experienced independent insurance advisor, we bring the knowledge and expertise to help property owners in high-risk areas obtain the best coverage at the most affordable price.
If you own or plan to purchase property in a difficult market, contact B. F. Saul Insurance for guidance on securing homeowner’s insurance.