California is facing one of the most challenging insurance environments in its history. Market conditions are changing rapidly and dramatically, driven by the increased frequency and severity of natural disasters, inflation, and a complicated regulatory environment.
Insurance brokers and high-net-worth (HNW) individuals are having difficulty placing and renewing insurance policies across all lines of business in California. We explore the broader impact of systemic industry challenges on high-net worth personal insurance customers in our latest State of the Insurance Market Report.
Understanding California’s complex insurance market is essential for every California homeowner. Creative, non-traditional solutions have become the norm.
Here’s what you need to know — and do — to navigate California’s private insurance market and maintain adequate coverage.
Escalating complexity in California's insurance market conditions
What’s happening to insurance in California and why? These market conditions are changing the landscape:
Shrinking insurer capacity
California insurers are pulling out of the market. Some carriers stopped writing new property policies, others exited the state altogether. This leaves limited capacity in the remaining markets, making it harder and harder to secure proper coverage.
Rate increases
Carriers remaining in California are increasing rates across all lines of business and for all California risks. If you’re living in California, you’ve seen these increases firsthand.
Homeowners' insurance and auto insurance are the most strongly impacted lines, due to the volume of direct losses in those areas. Damages have been so widespread across the state and the losses are interconnected, leading to rate increases across the board, not just for property. Construction costs also continue to rise, further contributing to mounting homeowners' insurance losses and driving the hard market.
Many individuals are moving to the non-admitted market to secure adequate coverage. This often comes with significant rate increases. In the non-admitted market, a 50% increase is seen as positive, comparatively. Others are seeing rate increases of up to 300%.
Tighter underwriting requirements
The few carriers still doing business in California are becoming incredibly selective on what they underwrite. They are tightening requirements and looking for clean risks that demonstrate thorough risk mitigation measures.
Many individuals are seeing non-renewals on existing policies due to tightening requirements. Others are losing coverage due to carrier exits. Those in high-risk areas and CAT-zones are left with very limited options.
Non-admitted insurance carriers and creative solutions
Traditional “off-the-shelf" policies are no longer easily available in this complex environment. HNW individuals (and their brokers) are having to explore alternative solutions, get creative, and layer multiple policies to make sure they have coverage. Non-admitted carriers are playing a bigger role.
What is a non-admitted insurance carrier or market?
Non-admitted insurance carriers, also referred to as excess & surplus lines carriers, represent one of the fastest growing segments of the insurance industry. While both admitted and non-admitted carriers have to be approved to write business in a given state, non-admitted carriers are not subject to many of the same regulatory requirements as those that are writing business on an admitted basis.
There are two main differences between admitted and non-admitted carriers.
1. Insolvency
In the event of a carrier's insolvency, an admitted carrier and their clients would be eligible for compensation (up to a max of $300,000) from the state's insolvency fund. Conversely, non-admitted carriers and their clients are not eligible for compensation from the state's insolvency fund.
2. Flexibility of Rate and Form
Another major difference between admitted and non-admitted carriers is the flexibility of rate and form. All admitted carriers operating in a state are subject to having their rates and forms approved by the state, which in many cases is a lengthy process that could take anywhere from three to eighteen months (depending on the state). Non-admitted carriers have the flexibility of adapting both their rates and policy forms to meet market conditions as quickly as they can implement the changes in their systems. This gives them the ability to adapt much more quickly than admitted carriers.
A good example of non-admitted market flexibility and speed in California is the implementation of a Wildfire Deductible. Non-admitted carriers have quickly adapted to the number of wildfires that have ravaged the state by adding a Wildfire Deductible to their policies. This is similar to the Hurricane Deductible commonly seen in policies for states along the Eastern Seaboard. Admitted carriers have also tried to add a Wildfire Deductible, but the proposal has been rejected by the California Department of Insurance. Implementing a Wildfire Deductible has enabled non-admitted carriers to continue to write business in California while also protecting their balance sheets for future growth.
In the coming years, we believe that non-admitted options will continue to grow and become a greater part of the landscape in California, as well as many other areas prone to large catastrophic losses. Their ability to adapt, customize, and move quickly when market conditions change gives non-admitted carriers an additional tool that will serve them well in these challenging and dynamic times.
Creative solutions – multiple policy strategy
The days of a single insurer that covers nearly everything a HNW individual needs are behind us. Now, adequate coverage comes from multiple carriers and policies pieced together, tailored to each individual or family’s needs. Separate elements include workers’ comp, difference in conditions, personal liability, collections, auto, home, and umbrella liability. Piecing these policies together takes significantly more lead time than renewing traditional policies.
In the current California market, and with stricter underwriting, individuals may not have access to as high of limits as they did previously for both property and liability. Unfortunately, until market conditions change, not much can be done to obtain higher limits.
California Fair Plan
The California Fair Plan is a state-run insurer of last resort for property owners in high-risk zones with no other homeowners' coverage options in traditional or non-admitted markets. Even high-net-worth individuals may need to turn to the Fair Plan if they are in wildfire or CAT zones
The lead time on a quote for the Fair Plan is 10-14 days. Individuals in at-risk areas must, therefore, plan ahead when purchasing property.
Workers’ compensation: California law to provide coverage to domestic workers
It’s California law that homeowners must provide workers’ compensation for all domestic workers, even if those workers are part-time. Workers’ compensation is often included in traditional California homeowners' policies, but it is not included in non-admitted homeowners’ policies. Any homeowner with domestic employees must be sure to secure a separate, dedicated workers’ comp policy to ensure compliance and protect employees unless the staff is hired through an agency that provides this coverage.
Why is auto insurance difficult to obtain in wildfire-prone areas in California?
Auto insurance rates continue to rise and coverage can be more difficult to obtain if garaged in a wildfire-prone area. In addition, due to the hard market, many auto insurers in California are mandating 10-14 day waiting periods to bind new auto policies.
This means you should communicate with your broker well before purchasing a vehicle to make sure you have coverage at or near the time of purchase. This is especially true if you need a new California auto policy and are not just adding a vehicle to an existing policy.
Is flood insurance and earthquake insurance included in homeowners' insurance policies in California?
California experienced unprecedented flooding in the past year, in the wake of Tropical Storm Hilary and February’s atmospheric river. According to the National Weather Service, the past two years have been the second wettest back-to-back years in Los Angeles since the late 1880s.
A common misconception is that flood damage is covered under standard homeowners' policies. It isn’t. If you’re a homeowner in California, make sure you have flood insurance, purchased separately. Without it, if a flood event were to occur, you could be facing staggering out-of-pocket costs to repair damage.
Given the frequency and high potential of earthquakes in California, earthquake insurance is another must-have in the California market. Earthquake-related losses are also not included in standard homeowners' policies.
Why is risk mitigation more important than ever in California?
In this challenging market, it’s important to take every step to make sure you present your home as the best risk possible. This includes the following risk management and risk mitigation measures:
- Central station alarm monitoring —This is a #1 must-have. All carriers will look for it.
- Interior sprinkler system
- Water shut-off valves
- Seismic shut-off valves
- Retrofitting foundations to protect against earthquake damage
- Closed roof eaves and ember resistant vents
- Wildfire-resistant landscaping that creates defensible space
Pro-tip: You can work with wildfire defense groups who assess your property, create a report, and make suggestions on how you can better protect your home.
What should high-net worth individuals do in this challenging California insurance market?
Take the following steps to set yourself up for success:
Give your broker plenty of lead time
Brokers need as much lead time as possible to prepare quotes for new property purchases, especially since this may now require piecing policies together from different carriers. Loop your broker in on the home-buying process as soon as possible; contact your broker as soon as you make an offer on a home.
Communicate before buying a car
Talk to your broker at least 14 days before purchasing a vehicle.
Ask an advisor before submitting a claim
Consult with your insurance advisor before submitting a personal insurance claim with your carrier. In addition to offering immediate support, your advisor can help you understand potential implications on your broader insurance portfolio.
Pay on time
Some insurers will not reinstate coverage once cancelled for non-payment. This would require re-submission of your risk and requalification under the current new business guidelines that are stricter. On-time bill pay is also important to maintain a good relationship with the insurance company.
Be loyal to your insurer
Continuity with carriers is important and looking for a new insurer does not guarantee a better rate. In some cases, moving to a new carrier may result in non-renewal and fewer options.
Work with specialists who understand insurance in California
The market is not likely to soften anytime soon. HNW individuals must understand market realities and prepare for major ongoing changes. Risk mitigation, preparation, and adaptability are key.
California requires specialized brokers with specific licenses to write and place policies in California. Working with a broker with experience navigating the complexities of the California market is the best way to weather the storm and secure coverage tailored to your needs.
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