California’s Home Insurance Crisis
Over the last few years, Californians have seen many issues within the home and property insurance industry.
Source: Binyamin Mellish/Pexels
Some residents have been completely dropped by their insurance, or their contracts canceled. Others have seen their home insurance skyrocket to whopping amounts they cannot afford.
Insurance Companies Flee California
Meanwhile, some insurance companies have chosen to outright flee California, refusing to continue to offer insurance policies for the millions of people who live there.
Source: Mikhail Nilov/Pexels
National insurance companies have blamed various reasons for why they feel they can no longer do business in California — or, at least, in parts of the Golden State.
The Causes Behind This Crisis
Analysts have explained that insurance companies have increasingly worried about doing business in some high-risk, or disaster-prone, areas of the state.
Source: RDNE Stock project/Pexels
Natural disasters, such as devastating wildfires that can rage out of control, have increased in California in the last few years. As a result, home insurance companies are thinking twice about offering insurance to Californians who live in these high-risk wildfire areas.
Climate Change Makes Wildfires Worse
Experts have also pointed out that research and data have confirmed that climate change has only made hurricanes, wildfires, and other natural disasters much worse.
Source: Patrick Perkins/Unsplash
As a result, both Californians living in these disaster-prone areas, as well as insurance companies that give out policies in these regions, are learning how to adapt to these new times — all of which is fueled by climate change.
Understanding a New World
Meredith Fowlie, a UC Berkeley professor of agricultural and resource economics, recently opened up about how insurance companies and regulators are trying to understand this new world.
Source: Maurice Williams/Unsplash
She explained, “All of a sudden, regulators are finding themselves on the front lines of climate change, and that creates real challenges in rethinking how we’re regulating these property insurance markets.”
Lawmakers Try to Help Residents
As many Californians have struggled to find affordable coverage, state lawmakers have tried to help bring relief — and reform — to their citizens.
Source: Josh Hild/Unsplash
However, nothing helpful has yet been done. California’s last resort program, the FAIR Plan, has seen a huge increase in policies as residents flock to this more affordable option.
The Winner’s Curse
While Fowlie has explained that climate change and natural disasters have surely made this situation worse, she has also stated that other factors have contributed to insurance policies skyrocketing in price.
Source: De'Andre Bush/Unsplash
Fowlie has said that economists have noticed the hidden “winner’s curse” in this ongoing crisis — and this curse might explain why insurance companies have raised their prices so much in the last few years.
Raising Prices in California
Fowlie explained the winner’s curse by explaining that many insurance companies are looking at how the other chooses homes and customers.
Source: Logan Voss/Unsplash
She said, “Imagine that one company is pricing insurance at a very coarse level, and it is competing with another company that is pricing insurance at a very granular level.”
Only Receiving Higher Risk Customers
Fowlie then stated that this company is realizing they may be only getting higher-risk customers.
Source: Nikolay Maslov/Unsplash
“The company that is pricing at a coarser level might worry that it is only getting business from the higher-risk homes that the other company is less excited about insuring — and, as a result, it might reasonably raise prices to insure against this potential risk,” she explained.
Seeing the Winner’s Curse in California
Fowlie and other experts have stated that they’ve seen signs of the winner’s curse in the California insurance crisis. This causes many negative impacts on Californians.
Source: Nora Long/Unsplash
Fowlie said, “First, these winner’s curse price adjustments are putting upward pressure on premiums in high-risk areas. Companies with less granular information price insurance higher because they are worried about ‘winning’ higher risk homes.”
Regulations Do Harm Homeowners
California has long been under attack for its strict regulations. Fowlie has stated that these regulations do play a factor in this crisis.
Source: Michael Kahn/Unsplash
She added, “The second is reduced availability. California has price regulations in place which limit how much a firm can raise its rates without a public hearing. So if a firm with less granular information wants to increase prices to protect against the winner’s curse, and it runs up against that regulation, it might start pulling out of high-risk segments.”