California Homeowners Insurance Crisis and Reforms

Published Date: 01/17/2024

California’s homeowners insurance crisis has entered a defining moment—one that could determine whether the state’s property market stabilizes or continues to spiral.

As ABC 10 Sacramento’s Becca Habiger reported in a comprehensive interview with Insurance Commissioner Ricardo Lara, the state is facing unprecedented challenges in both the availability and affordability of homeowners coverage. Major carriers have paused or restricted new policies, premiums have surged, and the state’s FAIR Plan—originally intended as a “last resort”—is becoming the only resort for many residents.

“Having an uninsurable state is not an option,” Commissioner Lara said.

That principle now drives Lara’s Sustainable Insurance Strategy, an ambitious effort to modernize California’s decades-old insurance regulatory framework. But with wildfire season intensifying and thousands already dropped or priced out of coverage, many homeowners—especially in rural and high-risk zones—are asking whether the reforms will work in time.

The Crisis at a Glance

Over the past two years, most of California’s largest insurers—including State Farm, Allstate, and Farmers—have either paused new business or withdrawn from entire ZIP codes.

Homeowners in regions like Tuolumne, El Dorado, and Butte counties have been hit hardest, with premiums doubling or tripling.

“My payment has doubled, and I’m not making any more money,” said Tuolumne County homeowner Kathy Townsend, now on the FAIR Plan after being dropped twice.

Others report repeated non-renewals. “We’ve been canceled at least five, possibly six times,” another homeowner said. “The costs keep going up, and I don’t know what folks are going to do. It’s terrifying.”

Even renters and small business owners are affected as landlords pass rising insurance costs along. As Mark Dyken, who operates a homeless shelter in Tuolumne County, put it: “People right there on the margin now can’t afford that house they’ve had for years. Or their rent goes up because their landlord has to pay more.”

What’s Driving the Crisis

The causes are complex but deeply interconnected:

• Climate Change: Record-breaking wildfires have driven insurers’ loss ratios to unsustainable levels.

• Inflation: Rebuilding costs have surged 30–40% due to labor and material shortages.

• Outdated Regulation: Proposition 103, passed in 1988, restricts insurers to historical loss data for rate-setting, even as wildfire risk accelerates.

As Lara told ABC 10, “We’re seeing the impact of some of the most devastating wildfires in our history, coupled with inflation that impedes the cost of rebuilding.”

Insurers argue they cannot price risk accurately without modernization. Without reform, they say, the market cannot sustain itself.

The FAIR Plan Under Strain

When traditional insurers pull out, homeowners turn to the California FAIR Plan—the state’s insurer of last resort. But the FAIR Plan offers only bare-bones fire coverage at high premiums, often requiring separate “Difference in Conditions” (DIC) policies for liability and theft protection.

For many residents, it is now the only option.

“We don’t want a FAIR Plan that’s growing,” Lara emphasized. “We’re essentially putting the riskiest homes under the FAIR Plan—and that’s not sustainable.”

As the FAIR Plan grows, so does financial risk across the entire insurance system, since participating insurers must share in its losses.

The Human Cost of the Insurance Breakdown

The ABC 10 report highlighted the severe personal impact of the crisis, especially among fixed-income residents, seniors, and retirees.

“For people who are poor or on fixed incomes, it’s just not feasible,” said Tuolumne County Supervisor Ryan Campbell. “They can’t afford groceries and a $5,000 insurance bill.”

Some residents have already left the state. “Homeowners insurance was the big one,” said Laura Callahan, who moved from El Dorado County to Tennessee after her premium quadrupled. “It was the unknown—we didn’t know if we could even keep getting insurance.”

Others remain trapped, uncertain how long they can hold on. “I’m single, divorced, and on a fixed income,” one homeowner said. “I don’t know what I’ll do if I can’t afford my house.”

Newsom’s Executive Order and the Turning Point

In September 2023, Governor Gavin Newsom issued an executive order directing Commissioner Lara to act swiftly to stabilize the insurance market after lawmakers failed to pass reform legislation.

Within hours, Lara unveiled his Sustainable Insurance Strategy.

“There’s no doubt that California is at an insurance crossroads,” Lara said. “This is a comprehensive strategy to modernize our insurance market.”

What the Sustainable Insurance Strategy Changes

Lara’s plan represents the largest shift in California insurance regulation in decades. Its core elements include:

• Faster Rate Reviews: The Department of Insurance is hiring more analysts and streamlining approvals to reduce months-long delays. “Something needs to be done right now,” Lara said.

• Catastrophe Modeling: For the first time, insurers will be allowed to use forward-looking wildfire risk models to justify rates. As insurance expert Karl Susman explained, this allows companies to predict future losses rather than rely only on outdated historical data.

• Mandatory Coverage in High-Risk Areas: Insurers must now write 85% of their market share in wildfire-prone regions in exchange for added pricing flexibility.

• Wildfire Mitigation Discounts: Homeowners who invest in defensible space, fire-resistant roofing, and other protective upgrades will qualify for required premium discounts.

Balancing Consumer Protection and Market Stability

Consumer advocates worry that catastrophe modeling could lead to higher premiums. Lara insists the reforms strike a necessary balance between affordability and solvency.

When asked whether conditions might get worse before improving, Lara replied, “I think we are at the peak. As these regulations come into fruition, you’ll see the industry coming back.”

He expects visible market improvement within months, with full implementation targeted for December 2024.

Local Government and Community Mitigation Efforts

County governments are also stepping in. Leaders like Supervisor Ryan Campbell are investing in vegetation management, resilience centers, and evacuation infrastructure. But they want insurers to recognize those investments in pricing.

“We’ve invested in mitigation on the community level,” Campbell said. “We’d like to see that reflected in affordability.”

California’s Crisis in a National Context

California is not alone. Florida, Texas, and Louisiana are facing similar insurance disruptions due to climate-driven losses.

The U.S. Senate Budget Committee has sent letters to 41 major insurers demanding explanations for coverage withdrawals and pricing strategies, signaling growing federal concern over the climate-insurance collision.

What Homeowners Can Do Now

While long-term reforms unfold, homeowners can take immediate steps:

• Review policy limits, exclusions, and renewal dates
• Invest in fire mitigation improvements
• Explore regional and specialty carriers through independent brokers
• Track updates from the California Department of Insurance
• Participate in public rate hearings when possible

The Road Ahead for California Homeowners

Lara’s reforms represent the most significant overhaul of California’s insurance regulations since the 1980s. If successful, they could restore competition, stabilize premiums, and reduce dependence on the FAIR Plan. If not, more homeowners may be forced out of coverage—or out of the state.

For now, the Commissioner remains optimistic. “They want to stay,” he said of insurers. “They want to continue to grow.”

But for residents facing five-figure premiums, uncertainty remains. “People are going to have to move away from our beautiful communities,” Campbell warned. “They just can’t afford fire insurance.”

Final Thoughts: Reform, Risk, and Responsibility

California’s insurance crisis did not happen overnight, and it will not be solved overnight. But the Sustainable Insurance Strategy marks a critical turning point—a recognition that 1980s-era regulations no longer match 21st-century climate risk.

For the first time, regulators, insurers, and consumers share the same goal: making California insurable again.

As Lara put it, “Having an uninsurable state is not an option.”

Whether the reforms succeed will depend on trust, transparency, and shared accountability among all stakeholders. Until then, homeowners across California continue to wait—for relief, for competition, and for the chance to once again feel secure in their homes.