Wildfires prompt reckoning for homeowners insurance costs

The devastating fires in Los Angeles could deliver a "substantial correction" to Californians' property insurance bills. 

Golden State homeowners pay relatively less to protect their homes compared to residents in the Southeast and Midwest, according to research. The same California regulation that has barred some providers from hiking premiums has also driven big-name insurers away, forcing more Californians to the state's insurer of last resort. 

Loss estimates from the deadly fires continue to rise into the billions of dollars. The California Fair Access to Insurance Requirements Plan could suffer a gut punch, which experts say could end an era of underpriced insurance in the state. 

"I think there is likely to be a substantial correction in order to get these insurers back to the table, in order to bring them back into the market," said Benjamin Keys, professor of real estate and finance at the Wharton School at the University of Pennsylvania, in a Jan. 10 webinar. "Premiums are going to need to rise significantly."

Experts in the panel hosted by the Global Strategic Communications Council highlighted Intercontinental Exchange data last October showing the stark difference in insurance payments from coast to coast. Los Angeles homeowners last summer paid $3.50 per $1,000 in policy coverage, compared to New Orleans and Miami homeowners paying $17 per $1,000 in policy coverage. 

The Southeast has been battered by severe hurricanes in recent years, while the Midwest has been subject to tornados and other harsh weather. Average property insurance payments nationwide have shot up 52% since 2019, with homeowners paying on average $181 per month as of last July, ICE found. 

The California Department of Insurance until this year barred insurers from passing on reinsurance costs to customers, and from using catastrophe models in projecting wildfire risk. Major insurers such as Allstate and State Farm stopped issuing new policies in recent years, citing inflation in reconstruction costs and exposure to catastrophes. 

It's too early to assess the impact of newly allowed catastrophe risk models. But the strain on the FAIR Plan could force an assessment on California policyholders, Keys said. That could in turn drive more insurance companies away. 

"That's going to encourage policymakers in other states to take a much closer look at their FAIR plans, and better understand their exposure, and ways to encourage private insurance to come back to the market," he said. 

Experts have cited pressures on insurers of last resort like in Florida, where the Citizens Property Insurance Corp. ballooned into one of the nation's largest homeowners insurers. 

Homeowners insurance costs will continue to rise, but it's too early to tell how much the latest fires will impact costs. 

Homeowners insurers also won't be so helpless in responding to the recent blazes, said Shanna McIntyre, co-founder and chief data officer at Delos, a managing general agent which partners with carriers to provide policies. The insurance landscape is more prepared than it was in 2018, when the Camp Fire disaster shocked the state. 

"There's already a lot of new entrants coming in that are starting to rely a lot more on better wildfire science and more accurate underwriting based on the homes and the landscape," she said. "There will probably be some initial shock, but I think that there's a lot more market players that are set up to handle these kinds of events."

California meanwhile also moved to protect homeowners last week, as the state's Department of Insurance placed a moratorium on insurers from canceling or non-renewing policies in certain affected areas for a year. 

The cleanup in Los Angeles has yet to begin, as firefighters fend off more severe gusts Tuesday. Lenders in the meantime should pay heed to insurance issues, even for refinance customers, which wasn't a concern in the past, said Jeff Walsh, president of LDI Mortgage at Loandepot.

"It could potentially take much longer to find that coverage," said Walsh. "You've got to get ahead of it, or you may be missing closings and things of that nature, or simply not be able to qualify a borrower."

The lending veteran cautioned that mortgage applicants on the margins may no longer meet debt-to-income requirements as a result of the escalating costs. While there are no statistics on the number of consumers to whom that's happened, mortgage professionals have seen it in areas with rising flood risk.

"A serious intellectual look needs to be taken at the problem, and how can government policy intervene," he said. "I think that's what's going to be required."