Wall Street Journal | April 24, 2025
California’s Home Insurance ‘Titanic’
Californians these days dread receiving a letter from their home insurer as much as from the tax man. Insurance rates are skyrocketing, and they may have to increase much more to correct for years of government price controls.
That’s the message from a new American Enterprise Institute (AEI) report that compares risk-insurance rates in the states. Insurance premiums across the country have climbed in recent years, but nowhere more than in California.
AEI housing expert Ed Pinto calculates that median insurance premiums (not including flood, earthquake, personal injury and property coverage) have risen 90% in California over the last six years, compared to 59% nationwide, 47% in Texas and 54% in Florida.
Yet California premiums still haven’t kept pace with insurers’ growing liabilities. The report finds that California’s premiums measured as a share of a home structure’s cost (0.74%) are still significantly lower than in such states as Florida (1.22%) and Texas (1.09%). This is why insurers in California have been losing money and fleeing the state.
About nine of California’s top 12 home insurers have paused or restricted new business since 2022. Seven have disclosed plans to drop policies. An increasing number of homeowners, especially in areas with high fire risk, have been forced to obtain coverage from the state’s insurer of last resort, the FAIR plan.
The underlying problem is that state regulators for years suppressed rates by barring insurers from incorporating future wildfire risk and reinsurance costs into premiums. Regulators have also rejected rate increases in the name of keeping housing and insurance “affordable.” The result: Many insurers including the FAIR plan are woefully undercapitalized.
The Los Angeles wildfires in January required other insurers’ policy holders to bail the FAIR plan out. State Farm General, the state’s largest homeowner insurer, says it is paying out $1.26 in claims for every $1 it collects in premiums. It recently requested an emergency 22% increase to avoid an insurance death spiral.
If State Farm fails, other insurers and their policy holders will have to pay its claims, driving up premiums even more. This may be why state Insurance Commissioner Ricardo Lara, after initially rebuffing State Farm’s request, is supporting a 17% premium increase.
“We’re on the Titanic, and we see the iceberg. Now is not the time to argue about where to put the deck chairs. There is still time, your honor, to turn this ship around,” an attorney with Mr. Lara’s office told an administrative law judge this month. “If we don’t, over three million Californians are going in the water. And there are not enough lifeboats.”
Mr. Lara recently allowed insurers to begin using catastrophe models and factor their reinsurance costs into premiums. But as the AEI analysis indicates, California’s rates are still low relative to home values, so they probably will have to increase further.
By suppressing premiums for so long, regulators have fueled a run-up in housing prices. If proper underwriting had been allowed, higher premiums would have sent clearer signals about housing affordability. Now some owners will struggle to pay higher premiums. Something will have to give, and don’t be surprised if California asks Congress for lifeboats.