California Home Prices To Face Repercussions Of Insurance Companies' Withdrawal

With two of the biggest insurance giants pulling back from California, home buyers can expect surging premiums and difficulty in finding coverage.

State Farm and Allstate have stopped issuing new homeowner policies in the country's most populous state over the past few weeks, citing wildfire risks and rising construction costs as the reason behind their decision.

While the inventory is low, the demand continues to remain high for homes in California. As a result, it is difficult to determine the exact impact of State Farm and Allstate pulling back home insurance efforts on market prices, particularly in fire-prone areas.

"We thought with the increase in interest rates, momentum would slow down," Logan Francavilla, a Santa Rosa-based real estate agent, told San Francisco Chronicle. "But we're still seeing multiple offers and above-asking prices."

State Farm announced last week that it stopped accepting applications for all business and personal lines of property and casualty insurance due to inflation and "rapidly growing catastrophe exposure."

Another prominent insurance company, Allstate, joined State Farm in halting sales of property and casualty coverage to new customers in California, noting that it was expensive to underwrite policies in the state with thousands of natural disasters taking place over the years.

"We paused new homeowners, condo and commercial insurance policies in California last year so we can continue to protect current customers," Allstate told CBS News. "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."

Experts argue that with leading insurance companies retreating from California, more and more homeowners located in high-risk areas will be forced to sign up for the Fair Access to Insurance Requirements (FAIR) Plan as their last resort. There are some downsides to the plan, including less coverage and higher premiums.

"The FAIR Plan is not intended to compete with or replace traditional insurers and is meant to serve as a temporary safety net for property owners until traditional insurance coverage becomes available," FAIR said, according to The San Francisco Standard.

Notably, homeowners are not required by law in California to have insurance. However, it is mandated by mortgages for a loan.

"It's going to be a big blow to homeownership, especially for first-time home buyers who are struggling to get in the door as it is," another real estate agent named Tim Huxley said, as per San Francisco Chronicle.

Some California homeowners are already going without coverage, and a shortage of new policies could make it more difficult to buy a home. A state-run pool that serves as the insurer of last resort for many could face pressure as enrollments surge.

More than 1.2 million homes in California are at risk for extreme wildfire, as per data compiled by the Insurance Information Institute.

"The number of acres burned in California has grown steadily in recent years, as more people are moving into fire-prone areas of the state," the institute said in a statement, as reported by AP News. "More homes in harm's way — combined with rising costs of repairing or replacing houses either damaged or lost to fire — leads to increased insured losses."

Meanwhile, other markets including Florida, Colorado and Louisiana are also experiencing struggles to keep the insurance market healthy amid climate change risks.

Louisiana is in an insurance crisis after hurricanes Delta, Laura, Zeta and Ida slammed the state in 2020 and 2021. Many companies that wrote homeowners policies in the state canceled or refused to renew existing policies after claims accumulated.