California Struggles to Fix Insurance Challenges: Triple-I

What will it take for insurers to write more homeowners insurance in the Golden State? The Insurance Information Institute’s (Triple-I) newly published Issues Brief on California’s risk crisis includes detailed information on the causes and what it will take for the market to stabilize.

A range of factors have contributed to the state’s risk crisis, including:

• Proposition 103, a three-decades-old measure that predates the impacts of climate risk on California’s insurance market
• Lack of underwriting profitability over the last decade
• Increased building and replacement parts costs
• Rising wildfire losses, exacerbated by construction trends in the wildland urban interface (WUI)

“For years, insurers have sounded the alarm,” said Sean Kevelighan, CEO, 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.”

“Recent reforms, including the long-awaited Sustainable Insurance Strategy, are a step in the right direction,” Kevelighan continued. “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.”

State regulators’ application of Proposition 103 caused unintended consequences related to insurance availability and affordability, Triple-I’s report noted. For example, insurers couldn’t price catastrophe risk prospectively. Instead, regulators interpreted Prop 103 in ways that required prices to be based on historical data alone.

Furthermore, 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, Triple-I stated.

As insurance companies begin to insure more properties in California, the California FAIR Plan will return to its role as the insurer of last resort and reduce its market share to a manageable level.

About the Insurance Information Institute (Triple-I)

Since 1960, the Insurance Information Institute (Triple-I) has been the trusted voice of risk and insurance, delivering unique, data-driven insights to educate, elevate and connect consumers, industry professionals, policymakers and the media. An affiliate of The Institutes, Triple-I represents a diverse membership accounting for nearly 50% of all U.S. property/casualty premiums written. Our members include mutual and stock companies, personal and commercial lines, primary insurers and reinsurers – serving regional, national and global markets. Brokers, agents, consultants, educators and other insurance industry professionals are among Triple-I’s associate members.

About The Institutes

The Institutes are a global not-for-profit comprising diverse affiliates that educate, elevate, and connect people in the essential disciplines of risk management and insurance. Through products and services offered by The Institutes’ nearly 20 affiliated business units, people and organizations are empowered to help those in need with a focus on understanding, predicting, and preventing losses to create a more resilient world.

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“For years, insurers have sounded the alarm. 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."