Why are Insurance Companies Pulling Out of California
Date: 29 August, 2023
Published by: Bay Area Housing Trends
Blog by:
Margaret Barton
We know about the catastrophic wild fires California has experienced but what exactly does this mean for an insurance company, why don’t they want our business? Here’s a slightly different perspective, let’s look at the dollars and cents of the business (and, yes. it’s probably TMI but I don’t know how to say it briefly).
* For a small insurance carrier to be able to write insurance in California, they must have at a minimum $2,000,000 in “free flowing capital” yearly.
* The average cost of homeowners insurance in CA is $1,084 per $250,000 in reconstruction cost. The average cost to rebuild a home in San Jose is $700,000. This means the cost to insure the average home in San Jose is $3,035.20 per year.
* Using Redfin’s Housing Data – San Jose CA. In June 2022, there were 667 home sold in San Jose. Total earned insurance premiums on these homes would be $2,024,478.40.
* Here is the equation that every single insurance carrier must run:
(Homes Sold X Premium Per Home) – (Paid In Capital + Operating Expenses) = Surplus before claims.
* Let’s look at the math. We’ll assume carriers had operating expenses from 6/22-6/23. ($2,024,478.40) – ($1,000,000 + 0) = $1,024,478.80
* According to Experian the average payout for a homeowners insurance claim is $13,955. This means if the carrier had 2 claims between 6/22 and 6/23 they would not meet the minimum surplus requirements. $1,024,478.80 – ($13,95+ $13,955) = $996,568.80.
Insurance carriers aren’t earning enough to even stay admitted, let alone to keep up with the rising cost of construction due to wildfires, floods, and liability claims. In other words, there’s a huge problem here.
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WHAT THIS MEANS TO YOU AS A HOME BUYER?
* Buyers are used to submitting non-contingent offers on houses, the competition in our local market is intense; talking with an insurance agent is something buyers often don’t get around to doing until they’ve actually got a signed contract
* Remember, if you buy a home with no contingencies, that means you’re waiving your insurance contingency too. You want to make sure insurance is available and at a price you’re able to afford
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WHAT ACTION STEPS SHOULD YOU TAKE?
* Securing insurance needs to be discussed prior to submitting an offer. This is especially true if you’re purchasing a home in a flood or wild fire area. Your insurance agent will guide you
* You could put in place a contingency for obtaining fire insurance; ultimately this is your best protection but may not help in obtaining the house you want as you will most likely be competing with offers with no contingencies
* Know what you’re buying. Is the house in a flood zone? Is the house in a high fire zone? Are there possible permit issues? How about the electric? Does the house have a wood shake roof and, if so, how old is it? How old is the house and does it have foundation issues? Pass the address and property description to your insurance agent and talk about whether or not you’ll run into insurance issues. In other words, read the disclosures prior to putting in your offer.
With a little bit of forethought and planning you can avoid issues down the line. With over 30 years experience in the business I’ve helped my clients through many situations; I’ve also got a large circle of business referrals. If you need an insurance question answered, let me know and I’ll make sure you get help from a qualified professional. Would love to hear from you, text me if you have a question and/or would like to see a specific topic covered: 650-224-4747
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(A big shout out and thank you to LUCIANO SEWELL, Insurance Agent, HomeServices Insurance Agency, 650.338.4838, who helped me understand insurance from the perspective of the insurance carrier)
