California Property Insurance Crisis Explained

Published Date: 10/23/2023

Insurance is, at its core, a promise of protection. But in California today, that promise is under strain. Homeowners across the state are discovering that longtime carriers are pulling back, premiums are surging, and in some cases, coverage is becoming difficult to secure at any price.

From San Diego to Santa Rosa, insurers like State Farm, Allstate, and Farmers have paused new policy issuance or sharply limited exposure. According to insurance expert and *Insurance Hour* host Karl Susman, the current crisis is not sudden—it is the result of decades of regulatory structure colliding with rising catastrophe risk, inflation, and global insurance economics.

This is how California’s property insurance market reached a breaking point—and what may come next.

The Scope of California’s Insurance Crisis

California is home to nearly 40 million residents, and more than half are homeowners. That means roughly 20 million households depend on property insurance to protect their largest financial asset.

But this disruption extends far beyond single-family homes. It affects:

* Renters

* Condominium owners

* Apartment buildings

* Homeowners associations

* Rental property owners

Three of California’s largest homeowners insurers—State Farm, Allstate, and Farmers—collectively controlling about 21% of the market, have scaled back or stopped writing new policies altogether.

“When a quarter of the market stops writing, that’s not a slowdown—it’s a system shock,” Susman explains.

As major carriers retreat, remaining insurers become increasingly concentrated with higher-risk properties, intensifying instability across the entire marketplace.

Adverse Selection and the Shrinking Risk Pool

One of the most powerful forces driving today’s crisis is adverse selection—the process by which lower-risk policyholders exit the market while higher-risk customers remain.

“If you’re the only company still writing policies for high-risk homes,” Susman says, “you’ll get more bad risks than good ones. That’s a recipe for losses.”

As large insurers withdraw, smaller carriers are left absorbing a disproportionate share of wildfire-prone and catastrophe-exposed properties. To survive, they either:

* Severely limit new business, or

* Raise rates dramatically

This dynamic pushes even more homeowners into the California FAIR Plan, the state’s insurer of last resort, further concentrating risk and shrinking the private market.

Proposition 103 and Regulatory Gridlock

Passed in 1988, Proposition 103 reshaped California’s insurance regulatory framework with the goal of protecting consumers. It introduced three major changes:

* The Insurance Commissioner became an elected official.

* Insurers must obtain prior approval for rate changes from the Department of Insurance.

* Consumer groups gained the right to intervene in rate filings exceeding 6.9%.

While designed as consumer safeguards, these provisions have created long-term rigidity. Rate approvals can take months or even years, often delayed by perpetual appeals.

One consumer advocacy group is responsible for more than 90% of rate filing challenges. Under Prop 103, insurers are required to pay the legal costs associated with these appeals.

“That’s not chump change,” Susman notes. “Every hour spent in hearings, every attorney’s fee—that all gets passed down. Eventually, we pay for it through our premiums.”

The result is a system where carriers fall behind real-world costs and are structurally blocked from correcting pricing quickly enough to remain sustainable.

Wildfires and the New Weather Reality

California’s wildfire exposure continues to escalate. By mid-2023, more than 5,000 wildfires had already burned over a quarter-million acres.

“Just because you’re not evacuating doesn’t mean a fire isn’t burning somewhere,” Susman explains. “Every one of those fires is being paid for by an insurance company—and that cost trickles down.”

In response, the Department of Insurance has promoted home-hardening and wildfire mitigation discounts. The California FAIR Plan now offers:

* Up to 10% premium discounts for home-hardening improvements

* An additional 5% credit for broader neighborhood mitigation efforts

These programs help, but they address only a small portion of the underlying systemic imbalance.

Inflation and the Hidden Cost of Rebuilding

Even without wildfires, inflation alone has strained California’s insurance market. Since 2020, the cost of rebuilding homes—labor, materials, roofing, plumbing, and cabinetry—has surged dramatically.

Yet from 2020 through early 2023, rate approvals were effectively frozen for nearly 33 months.

“They were collecting $100 and paying out $120,” Susman says. “That’s not sustainable. And when companies can’t make money selling insurance, they stop selling it.”

Today’s sharp premium increases reflect what Susman calls “rate recovery”—a delayed but unavoidable correction for years of suppressed pricing.

Reinsurance and Global Catastrophe Exposure

Reinsurance—insurance for insurance companies—is a largely invisible but critical layer of the market. California insurers transfer portions of their catastrophe risk to massive global reinsurers, many based in Europe.

As global disasters multiply, reinsurance premiums have surged. However, under California’s current regulatory framework, most insurers cannot fully factor reinsurance costs into rate filings.

“Reinsurance is a good thing,” Susman explains. “It keeps companies stable and ensures your claim gets paid. But when carriers can’t reflect that cost in their rates, the math stops working.”

This disconnect places further pressure on already stressed insurance balance sheets.

Expanding Coverage Expectations and Rising Exposure

Homeowners insurance began as simple fire protection. Over time, consumer demand and competition expanded coverage to include:

* Theft and vandalism

* Internal and external water damage

* Personal liability

* Loss of use and temporary housing

* Falling objects and collapse

“We’ve gone from basic fire protection to policies that cover everything from leaks to lawsuits,” Susman says. “That’s a massive shift in both exposure and expense.”

Many policyholders still view insurance through the lens of fire-only protection, even though today’s policies insure against dozens of perils. As coverage breadth expanded, so did claims severity and pricing pressure.

Regulatory Reform and the Path Toward Market Recovery

State leaders now acknowledge that California’s insurance regulatory system requires modernization. Current reform discussions include:

* Allowing the use of catastrophe modeling in rate calculations

* Permitting reinsurance costs in rate filings

* Streamlining the rate appeal process

“The Department of Insurance gets it. Sacramento gets it. They know the market has to be flexible again,” Susman says.

He expects insurers to begin cautiously returning to California markets around 2025, though near-term rate increases are unavoidable.

“Premiums are going up. That’s the bad news. The good news is, it’s the first step toward rebuilding a functional, competitive market.”

What California Homeowners Can Do Right Now

While conditions stabilize, homeowners can reduce risk and protect insurability by taking proactive steps:

* Maintain continuous coverage, even if it requires temporary placement with the FAIR Plan

* Harden homes with defensible space, fire-resistant roofs, and ember-resistant vents

* Document property with updated photos, inventories, and appraisals

* Work with independent insurance brokers who can access specialty and surplus markets

* Support regulatory reform efforts that modernize Proposition 103

These actions won’t eliminate market volatility, but they can preserve access to coverage and improve long-term affordability.

Conclusion: Toward a Smarter, Sustainable Insurance Market

California’s property insurance crisis is the result of a perfect storm: rigid regulation, rising catastrophe exposure, inflation, reinsurance pressures, and evolving consumer expectations.

Yet the path forward is visible. With regulatory modernization, accurate risk-based pricing, and expanded mitigation efforts, the state can rebuild a competitive and sustainable insurance system.

“Insurance isn’t complicated,” Susman insists. “It’s about making sure the money’s there when you need it. But to make that happen, the system itself has to work.”

If California succeeds in restoring balance, its experience may well become the national blueprint for insurance reform in an era of escalating risk.