California Homeowners Insurance Market
The Challenge Continues for Carriers and Producers
James J. Court, CPCU, ARe – March 22, 2019
The catastrophic wildfires of 2017 and 2018 are driving a fundamental shift in the California homeowner insurance market for consumers, insurance carriers, and producers.
The past two years have been very challenging for the California homeowner insurance market. Of the top 100 homeowner insurance carriers in California for 2018, seventy eight posted homeowner line of business combined ratios in excess of 100%, with 34 posting combined ratios in excess of 300%. The 2018 overall combined ratio for this group was 219%, down slightly from 248% in 2017. One carrier has been placed under the supervision of the California Department of Insurance, and many more could face downward pressure from rating agencies.
There are many factors driving carrier performance in these events, from legacy growth imperatives, regulatory mandates post catastrophe event, price competition, the effects of climate change, forest management, and construction in the wildland urban interface are a short list from a much longer list of issues.
Some of the challenges carriers face as a result of the events of the past two years include:
- The cost of reinsurance has increased and will continue to increase, and capacity will contract until the market normalizes from historically low rates, especially for books of business heavily exposed to wildfire that suffered losses in 2017 and 2018. After two years of heavy losses, reinsurance markets are working to reduce their aggregate exposures, and have reevaluated their expected loss calculations. Contract terms such as loss occurrence hours clauses and geographic definitions are tightening back to historical norms.
- Homeowner rate increases in California are limited to 6.9% without going to a hearing. It will take multiple rate increases over time to adequately price a book of business.
- The need for reinsurance is driving significant underwriting actions including new business moratoriums and non-renewals to reduce concentration in wildfire prone areas.
- Wildfire risk selection tools, while providing some underwriting rigor for wildfire need to be supplemented by good underwriting judgment.
- Significant underwriting actions can result in significant book disruptions, regulatory complaints, and disappointed producers. The reputational risks are significant and can have far-reaching effects into the future.
Challenges producers face include:
- Book disruption as a result of carrier actions. These can include restrictions or moratoriums on new business, non-renewals, commission actions to drive desired behavior, or an implied “package business only” requirement.
- Customers who are dissatisfied with a non-renewal or rate increase resulting in loss of the entire account.
- Increased expenses to remarket policies, and a reduction in agency income as a result of a smaller book of business.
It remains to be seen if the admitted market will continue to insure a significant number of individual risks exposed to wildfire, or if many of these risks will be classified as specialized risks to be insured by the FAIR plan and/or the excess and surplus lines market. The regulators and legislators would prefer that the admitted market continue to insure wildfire exposed risks, and are watching closely to advocate for consumers while balancing the need for a viable homeowner insurance market.
With any market disruption, the environment provides opportunities for carriers to bring new, innovative products which can effectively address the challenges of wildfire underwriting in California. Carriers with a balanced book of business, healthy reinsurance and regulatory relationships, accompanied by partner producers, and a healthy dose of product and underwriting discipline will ultimately be the most successful.
Jim Court is principal and CEO at Navogen, an insurance and technology consulting firm. He has over twenty years of experience in the California homeowner insurance market with books of business exposed to wildfire.