How California and Florida are trying to stave off the home insurance crisis

You're reading Route Fifty's Public Finance Update. To get the latest on state and local budgets, taxes and other financial matters, you can subscribe here to get this update in your inbox twice each month. You can find a full archive of these newsletters here.

Welcome back to Route Fifty’s Public Finance Update! I’m Liz Farmer, and this week I’m writing about how states are responding to the rising cost of home insurance.

With two months left in 2023, the U.S has already suffered the highest number of billion-dollar weather disasters on record with wildfires and severe storms wreaking havoc from Hawaii to Florida. As of September, natural disasters had caused more than $57.6 billion in damage this year. 

As the cost of natural disasters rise, insurance companies are increasingly looking at their portfolios and evaluating risk. According to a Harris Poll survey, more than 60% of Americans say home insurance premiums have gotten more expensive over the last year. And that’s if they can even get coverage.

"In the first half of 2023, homeowners and commercial property claims costs increased by 36% and 30% respectively [year-over-year], driven up by inflation and natural catastrophe losses," the insurance giant Swiss Re told Newsweek last month. The company added that insurers’ losses on homeowner policies were the highest in over a decade, and as part of their response, “insurers are restricting business in catastrophe-prone markets."

Perhaps nowhere in the country is the crisis more widespread than in California and Florida, where more insurers have been retreating due to rising costs. Florida has had several major insurers leave since the 1990s, but this year alone four companies have announced they will stop writing new policies. California has fared no better—at least five large insurers, including State Farm, Allstate and Farmers, have also restricted business there.

California and Florida have historically managed their home insurance markets very differently. While California has heavily regulated home insurance rates to keep costs down, Florida has put up public money to back the state-sponsored insurer of last resort. 

But both approaches are strained by the continued exodus of insurers, and some worry that states are missing the larger point.

“States need to look more holistically at mitigating the impacts of natural disasters,” said Natalie Cohen, founder of the firm National Municipal Research. “Just addressing home insurance costs won't fix this.”

Regulating vs Subsidizing Home Insurance

Nevertheless, both states took steps this year to shore up their very different approaches.

Florida has long subsidized home insurance via its Hurricane Catastrophe Fund, which helps support reinsurance (insurance for private insurers), and its state-sponsored Citizens Property Insurance Corporation, which functions as an “insurer of last resort” for people who can’t find private coverage. But as more companies drop homeowners from their rolls, policies under the public program have swelled. Between October 2020 and October 2023, the number of policies under Florida’s plan nearly tripled to cover more than 1.4 million property owners. 

Meanwhile, the Hurricane Catastrophe Fund is losing money. Following Hurricane Ian in 2022, the fund estimated it would have $10 billion in losses—just months after state lawmakers agreed to spend $2 billion on propping up the fund.

California’s approach to keeping homeowners insured has been to heavily regulate and restrict rate increases. Whereas other states allow insurers to consider current risks such as whether a home is in an area prones to wildfires, California only allows insurers to calculate rates based on claims over the past 20 years. This system has kept insurance rates artificially low: In a state where wildfires have wrought billions of dollars in damage, the average cost of home insurance is nearly one-third less than the national average. 

“How would you do business in a wildfire-prone area where you’re not allowed to look at fuel density [uncleared brush] around you?” Janet Ruiz, a spokesperson for the Insurance Information Institute, told The San Francisco Standard.

As more California homeowners get dropped by insurers, the state’s Fair Access to Insurance Requirements, or FAIR, plan is growing. The plan is a privately funded consortium of all licensed insurers in the state, so when insurers leave California it means fewer companies backing a plan that has more than doubled in size between 2018 and 2022. More recently, a spokesperson for the plan said FAIR was getting 1,000 applications a day.

With both states’ last-resort insurers facing potential insolvency if trends continue, officials have taken steps to pass more costs on to homeowners as a way to keep the private market viable. 

Florida lawmakers passed legislation that reduces insurers’ lawsuit risk and allows them to offer policies to customers of Florida’s public plan, Citizens. If the offer is within 20% of their existing costs, residents are required to take it. The state also recently approved a double-digit rate hike for Citizens.

California lawmakers failed earlier this year to agree on reforms, so Gov. Gavin Newsom and Insurance Commissioner Ricardo Lara recently announced a new regulatory plan in which insurers can factor in climate risk and use forward-looking modeling when setting rates, as long as at least 85% of their market share is in wildfire-distressed areas.

Homeowner Hikes Not the Only Answer

The experience of both states is instructive as others are just beginning to deal with the rising cost of climate change and extreme weather events for homeowners. 

Oregon, for example, recently passed a law banning insurance companies from using any state wildfire risk map as a basis for increasing a homeowner’s premium or canceling/not renewing a policy.

It remains to be seen whether California’s new rules help stabilize the insurance market there, or whether rising prices will prompt more homeowners to go without coverage. But in Florida, there is some movement: Last month, Citizens shrank for the first time in years as five private insurers assumed just under 100,000 policies. The shift, though, means that the cost of home insurance in the Sunshine State—which was already more than twice the national average last year—is becoming unaffordable for many. 

Both states’ moves to a more market-based approach has pros and cons. On the one hand, the change could potentially discourage building in disaster-prone areas—something neither state’s previous approaches fully accomplished—and encourage more risk-mitigation activities like fire-resistant roofing or creating firebreaks around communities. Or, on the other hand, the approach is just a temporary Band-Aid. Some fear that global warming and the resultant natural disasters are too big for any one geographic area to insure against.

“Individual state-based, single peril insurance is ultimately very inefficient—you’re overcharging local residents and failing to get the level of uptake that is needed for solvency,” said Cohen of National Municipal Research. She notes that a national catastrophic insurance program (similar to the federal government’s no-fault insurance for nuclear power plants) could balance risk, location and seasonality so that one major disaster doesn’t put the entire fund on life support.

But S&P Global Ratings Analyst Nora Wittstruck says that as insurance regulators, states have a duty to proactively address a volatile home insurance market before it starts affecting economic growth.

“We expect highly rated states like California and Florida would take these kinds of measures to help stabilize insurance,” she said. “They’re recognizing it’s a problem.”