Back in May, Jazz pointed out that State Farm had stepped out of the California home insurance market after losing $4 billion in the state in 2021 alone. It turns out that was just the start of a broader trend.

State Farm, which insures more homeowners in California than any other company, announced in May that it would stop accepting applications for property and casualty insurance in the state (but would keep selling auto insurance). A week after State Farm’s move, Allstate, California’s No. 4 property and casualty insurer, confirmed by email that it had “paused” selling new home, condominium and commercial insurance policies in the state last year. Then No. 2 Farmers Insurance, which is headquartered in Los Angeles, said it put a cap on how many homeowners policies it will write monthly effective July 3. Geico switched its California operations to online-only last year, laying off branch staff. Chubb and AIG, which insure expensive homes, said last year they were retrenching.

With so many big companies pulling back or leaving altogether, we’ve had a string of local stories here in California about insurers who come up with surprising reasons to drop people’s policies. For instance:

AAA cited a puzzling reason for not renewing Marilyn Smith’s policy. She and her husband had drained their swimming pool to conserve water… during the drought!…

The couple drained the pool after their grandchildren grew up and moved away.

“We decided well, we don’t use it you know, the kids have moved in different states… that saves us on maintenance… and then just the water, because it does evaporate, so you have to be putting water in there every couple of days… and that’s not a small little pool. Water was becoming very expensive,” Smith said.

Now they use the empty pool like a hothouse to grow potted tomatoes and lettuce. But the AAA notice said the pool showed signs of “deferred maintenance.”

They canceled another homeowners policy claiming his roof was too old and needed to be replaced. The roof in question was only seven years old.

If you’re still wondering how AAA knew the couple’s backyard pool was empty, that’s because they’ve been flying drones over people’s houses looking for problems. One homeowner found this out after his insurance was canceled and he called the company to find out why.

His house isn’t in a fire zone, and he’s never filed a single claim in 15 years. Instead, the notice said CSAA found “debris, hazardous conditions, tires or a dilapidated car” in his yard.

But how would they know that? No one ever came to inspect. So, Sveen called the company.

“And they said, ‘Oh, we sent over a drone.’ And like, they have a drone that they sent over my property. Just flew into my yard. So, very shocked, yeah,” Sveen said.

The latest bad news was reported yesterday. Two more insurers are giving up on the state.

Two more insurance companies will exit the California homeowners market, further narrowing options for people seeking to insure their home or to purchase a house with a mortgage.

AmGUARD Insurance—a subsidiary of Berkshire Hathaway GUARD Insurance Companies—will withdraw its homeowners and personal umbrella programs in California, while Falls Lake Insurance will also end its homeowners program.

Both companies made the announcements in little-noticed filings submitted to the state regulator on July 21.

Why is all of this happening? Part of it is the string of wildfires the state experienced over the past few years when the drought was at its worst. Another factor is inflation which drove the cost of construction up dramatically after the pandemic. That meant that every time an insurer had to cover a repair it was way more expensive than it had been just a year or two earlier. The only way to avoid losing money is to request substantial rate increases from the state. That’s what State Farm did back in February.

Insurance company State Farm has asked to hike rates on homeowners by an average of 28.1% in response to wildfire risks and skyrocketing construction costs, according to the California Department of Insurance, which is charged with evaluating rate increase requests…

“Insurance companies are trying to catch up and make changes to their business model so they can stay profitable and keep promises to customers,” said one Bay Area State Farm employee, who asked to remain anonymous as she is not authorized to speak to the press.

Personally, I haven’t seen a big jump in home insurance yet but I have seen it in car insurance which has gone up dramatically in the past year. But I was talking to a friend over the weekend who got dropped by his insurer and hasn’t been able to find replacement home insurance yet.

There’s another part of this story that doesn’t make it into the headlines. It’s not just inflation and climate change/wildfires that are to blame. It’s also California’s regulatory environment:

California is the only state that won’t allow insurers to use rising reinsurance costs to justify rate-hike requests. It’s also the only state that won’t let insurers base their requests on projections of rising costs. Regulators look backward at claims experience over the previous 20 years. So even though climate change is likely to cause more losses from wildfires, mudslides and the like, the state excludes it from consideration. Proposition 103, passed in 1988, allows public interest groups to contest requests for hikes of 7 percent or more. That drags out and sometimes stymies the approval process. Delays in the process are especially costly when inflation is running hot. No wonder insurance companies are cutting back in the state or getting out…

Michael Soller, the deputy commissioner for communications at the California Department of Insurance, told me that the department held a four-hour workshop on July 13 on how to set rates. It looked at the two approaches that are common in other states: taking reinsurance costs into account and looking forward to assess risks, not just backward. The insurance commissioner, Ricardo Lara, whose position is elected, has not decided yet if he’s in favor. “I would say this is a top priority right now,” Soller said. “Everything is on the table.”

So insurers are fleeing or refusing to write new policies and California is thinking about maybe doing something to make it possible for these companies to break even and remain in business. It really is a no win situation for homeowners and for the state. The best case is rates go up 20-30% which will probably drive more people out of the state (or leave them uninsured when disaster happens).

The other possibility is that companies aren’t allowed raise rates and more of them decide to pull out. Who is going to want to buy a home here if they know it can’t be insured? If this trend continues, eventually there will be no one left but the state itself to take over insuring homes. You can probably imagine what an expensive disaster that would be.