Triple-I: California homeowners insurance rates must rise despite any regulatory progress

By Isha Marathe

April 11 - (The Insurer) - Regardless of any move California regulators might take, the state will not be able to avoid the inevitability of homeowners' premium rate hikes amid more aggressive wildfire events and tariff uncertainty, the Insurance Information Institute (Triple-I) said.

Homeowners and auto insurance rates have been rising in California as a result of climate-related risks and replacement costs that skyrocketed during the pandemic and Russia's invasion of Ukraine, Triple-I said in an issue brief.

The state's regulators have tried various methods of easing the costs on policyholders and drawing insurers back to the state but the number of policies in the state’s property insurer of last resort has still been increasing.

In December 2024, the exposure of the California FAIR Plan was $529 billion, reflecting a 15% increase since September 2024 and a 217% increase since fiscal year-end 2021.

The FAIR Plan this year will begin offering higher commercial coverage for larger homeowners, condominium associations, homebuilders and other businesses. The commercial plan will cover up to $20 million per structure and a total of $100 million per location per year.

But Triple-I said that it is unlikely that these strategies will be enough to accommodate the state's fast-changing risk landscape without increasing premiums. Additionally, some of the regulators' moves might actually cause complications for underwriters and policyholders alike, it added.

"(M)uch of California’s problem is related to regulators’ application of a 1988 measure – Proposition 103 – that constrains insurers’ ability to profitably insure property in the state," Triple-I said.

A key provision of Proposition 103 is that insurers must obtain prior approval from the California Department of Insurance before implementing new property and casualty premium increases.

The proposition also initially required insurers to reduce their rates by 20% and was meant to inculcate more consumer participation in the process.

For Triple-I, today's application of the law doesn't take into account the vastly different risk profile in the state than in 1988.

"Insurers couldn’t price catastrophe risk prospectively. Instead, regulators interpreted Proposition 103 in ways that required prices to be based on historical data alone," Triple-I said.

"Accurate underwriting and pricing were inhibited by restrictions on incorporating reinsurance costs into pricing. If premiums can’t reflect reinsurance – particularly in catastrophe-prone areas – insurers must pay for them from policyholder surplus, reduce their market share in the state, or do both."

The institute said that allowing consumer advocacy groups to intervene in the rate-approval process has further complicated insurers' ability to respond to changing market conditions, driving up administration costs.

While insurers have earned healthy underwriting profits on their homeowners business in all but two of the 10 years between 2013 and 2022, the claims and expenses paid in 2017 and 2018, largely due to wildfire-related losses, were so extreme that the average combined ratio for the period was 108.1%, Triple-I said.

Triple-I said that risk-based pricing is integral to maintaining policyholder surplus, which means aligning underwriting and pricing with the cost of the risk.

“For years, insurers have sounded the alarm,” said Sean Kevelighan, CEO of Triple-I. “They have warned policymakers about the urgent need to modernize regulations so the system can function in the face of increasing climate risks. But change has been slow and the consequences are now clear.”

Kevelighan said that recent reforms, including the long-awaited Sustainable Insurance Strategy, are a step in the right direction.

"With implementation beginning in 2025, the new strategy poses a potential to fix the troubles of the past and rebuild with a more robust, sustainable and insurable market after what may be the worst wildfires in California’s history," he said.