American National Insurance is the latest insurer to announce it is either exiting California or limiting its property insurance business due to decreased profitability in the wake of devastating wildfires and state regulations that critics say are excessive.
American National’s announcement in February comes on the heels of decisions by State Farm and Allstate to discontinue writing new property insurance policies in the state. The insurers’ actions have occurred as more and more homeowners are turning to the California FAIR Plan – a syndicated fire insurance pool initiated by state law – for bare-bones coverage.
Observers of the insurance upheaval attribute it more to climate change, construction industry inflation and the state’s regulatory regime rather than to the state’s legal climate, even though California ranked No. 3 on the American Tort Reform Federation’s most recent Judicial Hellholes list.
An American National spokesman, Scott Campbell, said that as of Dec. 31 of last year, the company had 36,475 homeowners policies in California, or 0.4% of the state’s homeowner market.
“Multiple factors are driving this decision including primarily that several years of increased frequency and severity of weather events have caused an increased lack of profitability in this line of business,” Campbell told the Southern California Record in an email. “Inflationary pressures have also increased the cost of claims payments, which has compounded the lack of profitability.”
AIG and Farmers have also recently bailed out of the California property insurance market.
As a result of insurers exiting the state, the California FAIR Plan has increased its policy load from 141,391 in 2015 to 268,231 in 2021, according to the state's Department of Insurance. And in last year alone, the number of FAIR plan policies increased 20% to more than 330,000 policies, the state’s insurance commissioner, Ricardo Lara, reported.
“Put simply, increasing the number of policyholders in the FAIR Plan threatens the solvency of insurance companies in the voluntary market,” Lara said to a legislative committee in December. “If the FAIR Plan experiences a massive loss and cannot pay its claims, by law, insurance companies are on the hook for the unpaid FAIR Plan losses.”
Kristi Dean, managing partner for Stone Dean LLP, said the financial situation for the remaining carriers in the state remains serious.
“Carriers that have elected to remain in the state will likely face enormous natural catastrophic risk exposures – especially when it comes to wildfire events,” Dean wrote in a recent blog post. “In response and in an effort to help control costs, it is expected that these insurers will feel the pressure to try and offset risks by not only increasing rates, but also in the tightening of underwriting criteria such as the inclusion of special coverage limitations and higher deductibles.”
Data from the National Centers for Environmental Information indicates that the costs of natural disasters in the state have been accelerating.The federal agency reported that between 1980 and 2023, 46 disaster events costing $1 billion or more took place in the state, with nearly three-quarters of those events occurring in the second half of that period, from 2001 to 2023. The data is adjusted for inflation.
The Insurance Information Institute (III) has warned that Proposition 103, the landmark insurance reform passed in 1988, is responsible for the financial straits the insurers are facing in the state. That initiative requires insurance pricing to be based on historical data alone and does not account for the cost of reinsurance that insurers in the state must bear, the III said in a recent report.
From 2013 to 2022, home insurers have on average been operating at a loss, having to pay out $108 for every $100 received through premiums, according to III. The years 2017 and 2018 were particularly devastating due to wildfire losses in California.