Last week, as most people were looking forward to porch parties and barbecues over the long weekend, one of the largest home insurers in the country had a different focus: lumber costs and wildfires.
State Farm, which services 91 million policies across the country, announced last Saturday that it would no longer be offering new home insurance policies in the state of California, citing “rapidly growing catastrophe exposure,” among other things.
State Farm’s decision was not at all unexpected, according to Christophe Choo, an agent with 30 years of experience in the Los Angeles area.
“There was no surprise for me, because the last five or six years, maybe more so the last three, four years, many of the big insurance carriers are no longer doing quotes in California. So I’ve been dealing with this day to day,” he tells RISMedia.
The change will not affect current policyholders, according to a statement issued by the company, but goes into effect immediately and includes both business and personal insurance.
The announcement comes as home insurance costs have broadly risen, hitting coastal states hardest. Some areas have seen average premiums rise 50% or more, as hurricanes and other natural disasters cause billions of dollars in damage and the cost to repair or replace homes skyrockets.
Choo says there is little the average agent can do about these spiraling costs besides educate clients, but adds that the insurance problem is getting so bad in his region that it could sink deals.
“I had one client who almost backed out of a major deal just because of the insurance,” he says. “Saying, ‘Oh, we didn’t expect to pay this amount of money, so we’ll skip buying the house.’ I was able to work out the deal, and we closed, but that was definitely a big challenge for them, because they weren’t prepared—they knew it was going to be high; they didn’t know it was going to be that high.”
According to insurance analytics company LexisNexis, California saw a 25% increase in insurance rates in 2022—much lower than some states, but higher than the national average.
State Farm, in its statement, promised to “work constructively with the (California Department of Insurance) and policymakers,” leaving the door open for a return, but called the move “necessary.”
But for agents working in these disaster-prone states, elevated insurance costs promise to be another kink in an already uncertain market, with affordability still a huge barrier for buyers and an overall dearth of consumer confidence. According to insurance marketplace Policygenius, 14 states saw insurance premiums top $2,000 in 2022, with four states (Texas, Oklahoma, Kansas and Nebraska) breaking $3,000.
Choo says in California, the increase in premiums has been driven by one particular disaster: wildfires.
“Big carriers just don’t want to insure in California basically due to the wildfire risk,” he says, “because we have had quite a few major fires in California the last few years. Earthquakes have become an issue as well because we are obviously earthquake territory…deductibles have gone up, and there’s very few carriers.”
What to know
Choo knows a little bit about insurance—his father owned an insurance agency, where he worked for a short time. He says there are workarounds when insurance becomes complicated.
“You might have to get two or three different policies from two or three different carriers to insure different portions of the risk. We closed a deal recently—I think we had two or three different carriers to cover the full risk,” he explains.
Another deal required bringing in a speciality insurance provider—namely, Loyd’s of London, which provides “creative” risk management solutions, according to its website.
For Choo, working in the Los Angeles area in luxury, the numbers are often shocking—$280,000 a year to insure a $17 million new construction for fire liability.
“Two years ago, we probably could have gotten that policy for $40,000 or $50,000,” he guesses.
Knowing where costs will go up is vital, Choo says. He warns any client looking north of Sunset Boulevard that they should plan for “substantial” insurance costs due to fire risk. Other clients were dropped by their providers after recent wildfires, even though they didn’t make a claim or experience any damage—again, not something a real estate agent can do anything about except make sure their clients are educated.
All-cash buyers aren’t required to have homeowners insurance, Choo also notes—a very risky choice to make, but one that is becoming more common in the area. Making sure clients understand what they may or may not be covered for is another important service an agent can provide, with policies often full of complex clauses and calculations.
“That’s really important. I think one good piece of advice is to take time to really read through the details of the policy,” he says.
As far as State Farm’s decision to cease writing new policies, Choo doesn’t see any immediate or dramatic ripple effect. But he also doesn’t expect the company to reverse its decision anytime soon, as wildfires and building costs continue to weigh on the industry.
“Look, it’s a challenge for everyone. Everything goes up. It’s becoming more expensive selling a property,” he says.