California to Reform Home Insurance Rules. Is This Good News for Consumers?

The cost of home insurance in many U.S. states has shot up dramatically in recent years. A combination of inflation and unprecedented numbers of climate related disasters have had a significant impact on premiums. Moreover, in some states, insurers have pulled out altogether, leaving thousands of households with extremely limited coverage options.

We've seen this playing out in California, which faces an increasingly heavy toll from wildfires. The state regulates the rate at which insurance companies can hike insurance premiums through a regulation called Proposition 103. The rule was designed to protect consumers, but it's had the opposite effect. It's caused insurers to withdraw coverage and deem many homes "uninsurable."

California has one of the lowest average homeowners insurance rates in the U.S. in spite of the elevated risk of wildfire. The problem is that insurance companies say they can't charge enough to cover the risk. It is a nightmare for California homeowners -- or potential homeowners. Not least because most mortgage lenders require borrowers to have home insurance. This is why the state's sweeping home insurance reforms are good news, even though they'll likely result in higher premiums.

Heavy risk of wildfire

A recent report from First Street Foundation had some scary predictions about wildfire damage in California and the rest of the U.S. It said, "Recent disaster data shows that since 2009 there has also been a 270% increase in the cost of wildfires and a 335% increase in the number of structures destroyed by wildfires."

Not only is the risk of wildfire increasing, says the report, but the fires are also more likely to damage property -- in part because more homes are being built in wildfire-prone areas. For homeowners, that either means higher premiums or a cancellation of their policy. The First Street data shows nearly 5 million properties in the western U.S. are at risk of higher insurance rates or non-renewals.

One of the most at-risk areas highlighted is Riverdale, California. An expected 1,612 structures will be destroyed by wildfires this year. Jump forward to 2053, and the researchers believe this number will increase by 45% to 2,336. It predicts the average annual cost of those losses in Riverdale alone will reach almost $1.5 billion in 30 years' time.

As a homeowner, wherever you live, increased climate risks mean you can expect to pay more for insurance in the coming years. Insurify predicts that average home insurance premiums will rise 9% in 2023. If you are paying $2,500 a year now, that could rise to $2,725 -- or more if you live in a high risk part of the country.

California's insurance crisis

Last week's announcement from California's Insurance Commissioner Ricardo Lara comes after several years of wrangling between local politicians and insurance companies. In May, State Farm -- the country's largest home insurance company -- said it would stop issuing new policies in California. AIG had already made a similar move in January, and Allstate followed suit in June.

Unlike utility companies, insurers are under no obligation to provide coverage. When big insurance companies pull out of an area, it pushes homeowners to the insurance of last resort. In this case, that's California's FAIR (Fair Access to Insurance Requirements) plan. The difficulty with this is that it is expensive and overstretched. Plus, consumers can't shop around for the best price and FAIR coverage -- designed to be a temporary solution -- can be limited.

Phil Irwin, a FAIR representative, told KCRA that average annual premiums were around $3,200. In contrast, The Ascent research puts the average annual cost of home insurance in California at $1,252. That's a significant extra weight on people's budgets. More worrying? The First Street report says the number of non-renewals in parts of California increased by 800% between 2015 and 2021.

How California's home insurance reform will impact consumers

If you live in California and are struggling to find affordable home insurance, the reforms should help. On the one hand, it will almost certainly mean insurers can charge higher premiums. On the other, it means top insurers will return to areas with higher wildfire risk, reducing people's reliance on the FAIR plan.

Rate shopping is a key way to lower your insurance costs, but you can't shop around if no companies will insure you. The re-entry of top insurers also opens the potential to bundle your auto and home insurance. This can help you to swing a discount of as much as 25%. (At least, that's what Allstate promises on its website.)

Another way to reduce your costs? California's reforms require insurance companies to lower rates if homeowners take steps to protect their property against wildfire. You'll be able to get a wildfire risk score, which you can improve by joining fire reduction community programs or making your property more fire resilient.

Bottom line

There are no easy answers when it comes to climate change and home insurance. Whatever part of the country you live in, there's a good chance your premiums will increase in the coming years. Unfortunately, that's the least worst option: Paying higher rates is better than not being able to insure your property at all.