Opinion: How to cool California’s heated home insurance market

Insurers, homeowners and state officials can work together to create a fair, sustainable market, even in wildfire season.

As California grapples with another season of wildfires, the impact on the state’s insurance market has become increasingly dire.

The reasons are numerous and complex: the rise in wildfires and extreme weather, high construction costs driven by inflation, high costs of capital, legal system abuse, and longstanding regulatory impediments.

Homeowners are understandably weary of seeing premium increases or — worse — policy cancellations after years of paying premiums. Insurers, meanwhile, are struggling to bring in enough premiums to pay claims and serve customers while maintaining a sustainable business.

The simple fact is that home insurance in California has been underpriced for a long time. Since 2013, California home insurers have spent an average of $1.08 for every $1 in premiums collected. CSAA Insurance Group, specifically, paid out $1.14 for every dollar of premiums received in 2023, and we had to tap into reserves to pay claims to our customers.

Multiply that ongoing reality — paying out more than what’s coming in — across most insurers and you have an unsustainable market. Insurers simply can’t continue to do business in the state if they are losing money, and if insurers continue to leave the state, everyone loses.

And it’s a domino effect. When home insurance becomes unattainable, it negatively impacts the availability of mortgages, which in turn affects real estate, the banking industry, the construction sector and so on. Given that California has the fifth-largest economy in the world, the effects reverberate across the country and even globally.

How did we get here?

The increase in extreme weather due to climate change can’t be ignored. Additional contributing factors — including a history of inadequately maintained forests, an aging utility infrastructure, legal system abuse and building in areas that are more prone to wildfire — grow this risk significantly.

The regulatory environment is challenging as well. California is among a handful of states that require a lengthy approval process for any rate change, which doesn’t make for an agile marketplace. In addition, California regulators have not allowed the use of forward-looking climate change models to set insurance rates and instead have relied on increasingly obsolete historical data.

However, Insurance Commissioner Ricardo Lara has proposed a solution enabling insurers to use predictive catastrophe modeling to inform rate changes. And Gov. Gavin Newsom introduced a bill to speed up the process for insurance rate-change requests.

These are welcome developments, but to ensure Californians can find and afford home insurance, it’s critical that all stakeholders collaborate because everyone has a role to play in the solution. Besides regulatory reform, we also need to focus on wildfire mitigation. We need to appropriately manage our forests, upgrade utility infrastructure and develop responsible approaches to development, including building fire-resistant communities.

We also need homeowners to take meaningful steps to make their homes more resilient, which can unlock discounts to help offset insurance price increases. The Insurance Institute for Business & Home Safety offers a Wildfire Prepared Home program that provides rigorous standards based on scientific research. Even simple efforts, such as creating a 5-foot noncombustible buffer around the home, installing screens on vents, and maintaining decks and yards, can make homes safer.

I know this is a difficult process for all involved, but we’re ultimately on the same team. We all want fair rates for consumers and a stable home insurance marketplace. It’s in everyone’s best interests to work together to restore a thriving insurance marketplace in this incredible place we call home.

Mike Zukerman is president and CEO of CSAA Insurance Group, which offers insurance to AAA members.