Why California and Florida Have Become Almost Uninsurable

As different as California and Florida are, they share one big problem: Insurance companies are curtailing business in the two states. Some aren’t writing new policies. Others are going further and not renewing policies as they expire. I’m picturing vans pulling out of Sacramento or Tallahassee filled with sad-looking insurance mascots. Geico’s gecko. Jake from State Farm. The bandaged-up Mayhem from Allstate. The bald guy in the tweed jacket from Farmers saying “we’ve seen a thing or two.”

This shouldn’t be happening. It’s a sign of governmental dysfunction when insurance companies give up on what should be a mutually beneficial relationship: profitable for the companies and useful for the customers who need insurance. Californians and Floridians are scrambling to find replacements for the coverage they desperately need, particularly homeowners insurance.

State Farm, which insures more homeowners in California than any other company, announced in May that it would stop accepting applications for property and casualty insurance in the state (but would keep selling auto insurance). A week after State Farm’s move, Allstate, California’s No. 4 property and casualty insurer, confirmed by email that it had “paused” selling new home, condominium and commercial insurance policies in the state last year. Then No. 2 Farmers Insurance, which is headquartered in Los Angeles, said it put a cap on how many homeowners policies it will write monthly effective July 3. Geico switched its California operations to online-only last year, laying off branch staff. Chubb and AIG, which insure expensive homes, said last year they were retrenching.

In Florida, despite a different political climate, the story is similar. This month Farmers said it would stop selling Farmers-branded homeowners, auto and umbrella policies in Florida, which account for 30 percent of the company’s policies in the state. Some smaller companies have pulled out of Florida in the past year and others have gone out of business.

What went wrong? Several things at once, and not just climate change. (I refuse to call this a perfect storm.) Some of them, to be sure, were beyond the control of either the insurance companies or their regulators. Wildfires in California and hurricanes in Florida produced lots of claims. Housing prices and bills for construction and repairs have gone up, making claims larger. And insurance companies have had to pay more for reinsurance: Worldwide, average rates for reinsurance rose by a quarter last year and by another third this year, according to the London-based reinsurance broker Howden Tiger, an arm of Howden Group Holdings.

Other wounds, though, are self-inflicted. Fraudulent claims pushed several small insurers in Florida to or over the brink, partly because state law made it easy for professional fraudsters to inflate values and win big claims by suing. The state Office of Insurance Regulation said last year that Florida accounted for 79 percent of the nation’s homeowners insurance lawsuits over claims filed while making up only 9 percent of the nation’s homeowners insurance claims. The legislature has tightened the rules but claims are still being filed under the old standards, according to Nancy Watkins, who manages the San Francisco property and casualty consulting practice of Milliman, a consulting company.

In California, the bigger problem has been a culture of keeping rates low at all costs. California is the only state that won’t allow insurers to use rising reinsurance costs to justify rate-hike requests. It’s also the only state that won’t let insurers base their requests on projections of rising costs. Regulators look backward at claims experience over the previous 20 years. So even though climate change is likely to cause more losses from wildfires, mudslides and the like, the state excludes it from consideration. Proposition 103, passed in 1988, allows public interest groups to contest requests for hikes of 7 percent or more. That drags out and sometimes stymies the approval process. Delays in the process are especially costly when inflation is running hot. No wonder insurance companies are cutting back in the state or getting out.

California homeowners who lose their coverage can try to get a replacement policy in the excess or surplus line market, whose rates aren’t regulated by the state. If that fails, as a last resort they can get coverage from a state-run pool. California’s FAIR Plan, short for Fair Access to Insurance Requirements, is backed by all the insurers licensed to operate in the state. (They have no choice but to participate.) In a sign that the standard insurance market isn’t working for everyone, the FAIR Plan accounted for 3 percent of the state’s policies in 2021, nearly double the share from 2015 to 2018.

If the FAIR Plan loses money, the state is entitled to assess the private insurers. That means the customers they chose not to serve could still come back to cause them trouble if FAIR suffers massive losses in some future catastrophe. Rex Frazier, president of the Personal Insurance Federation of California, which represents many of those insurers, told me that’s a ticking time bomb: “It’s all right there in front of us, so we shouldn’t be surprised if it happens.”

Florida has a different flavor of market intervention. The state-run Citizens Property Insurance Corporation, which has turned into the fastest-growing insurer in the state, serves about 17 percent of insured Florida homeowners. People are eligible for Citizens if the only quotes they get from private insurers are 20 percent or more above the Citizens offer. But even Citizens’ rates are high (so as not to undermine the private market), so some people give up and go naked. About 15 percent of Florida homeowners have no property insurance, the highest share of any state, the Insurance Information Institute estimates.

In both states, the nightmare would be that insurance markets fully unravel and the state government has to take over entirely. There’s a precedent on the federal level. In 1968, Congress set up the National Flood Insurance Program because the private market wasn’t doing the job. Five years later, Congress began to require flood insurance for people living in zones at high risk of floods. Rates, however, were subsidized. Phasing out those subsidies has been politically difficult. And taxpayers are still getting hit. In 2017 Congress forgave $16 billion in debt that the program incurred so that it could cover losses from Hurricanes Harvey, Irma and Maria. The program is seeking cancellation of another $20.5 billion in debt now. People who have been flooded repeatedly account for a disproportionate share of claims. In one case, a $69,000 Mississippi home was flooded 34 times in 32 years, resulting in $663,000 in claims.

Returning to California and Florida: Watkins, who is an actuary, told me that insurers need to know that when they put in for a rate increase, “something rational will happen,” and customers need to know that “companies will be around to pay their claims over the long term.” She added, “I think what California and Florida have in common is an unreliable environment.”

Michael Soller, the deputy commissioner for communications at the California Department of Insurance, told me that the department held a four-hour workshop on July 13 on how to set rates. It looked at the two approaches that are common in other states: taking reinsurance costs into account and looking forward to assess risks, not just backward. The insurance commissioner, Ricardo Lara, whose position is elected, has not decided yet if he’s in favor. “I would say this is a top priority right now,” Soller said. “Everything is on the table.” Florida, meanwhile, is working to “depopulate” Citizens by getting private insurers to take over some of its customers.

Allowing private insurance companies to charge more would keep the market functioning, but it’s politically challenging. “People just don’t like to buy disaster insurance,” Yanjun Liao, an economist and fellow at the think tank Resources for the Future, told me. “That is a fact that is documented across the world.” Governments want insurance to be both affordable and available, but when it’s more affordable it’s less available and vice versa. “That tension is very hard to resolve,” Liao said.

One way to resolve that tension is to reduce the riskiness of living in California and Florida so that claims are smaller on average and policies can be cheaper and more available. To their credit, both states are strengthening building codes and rewarding homeowners who take extra measures to protect themselves. Florida, for example, offers free wind mitigation inspections and has approved about $200 million in matching grants to help people strengthen their homes.

There are bigger ideas for the long term. In 2017, the economist Enrico Moretti wrote an essay for The Times arguing that zoning laws should permit more density in urban areas, where wildfires are infrequent, so that fewer people would need to build homes in fire-prone places. Matthew Kahn, an economist at the University of Southern California, told me this week that allowing insurance companies to raise prices a lot in fire-prone areas would help instigate such a change.

Right now, though, Californians and Floridians are grappling with how to get insurance companies to stay or come back, right away. The notion that the insurers are bluffing to win higher rates is ridiculous, Watkins told me. Giving up market share that they fought hard to gain would make no sense if the business really was profitable, she said.

“Both states have to make it more attractive for capital to come in,” Rod Fox, the executive chairman of Howden Tiger, told me. “Insurance companies are not making massive amounts of money.”

The Readers Write

You wrote, “The government’s money used to be backed by real stuff like gold and silver.” What intrinsic value does gold or silver have? Most everybody could live their entire life without it. Economists’ ignorance of the social contract buried deep in our social fabric is debilitating.

Michael P. Smith
Los Angeles

If we’re talking in terms of pure efficiency and how the government should expend incentive dollars, nothing beats public transportation. When local transport becomes safe, convenient and readily accessible, we’ll have less need for cars and more room for living. I don’t think Toyota looks forward to that future.

Silvio Nardoni
Pasadena, Calif.

Quote of the Day

“What I’m saying to you this morning is communism forgets that life is individual. Capitalism forgets that life is social. And the kingdom of brotherhood is found neither in the thesis of communism nor the antithesis of capitalism, but in a higher synthesis. It is found in a higher synthesis that combines the truths of both.”

— Martin Luther King Jr., “Where Do We Go From Here?” Aug. 16, 1967