Florida's Insurance Crisis Spreads To California

A combination of rapid-fire hurricanes and extreme weather events has roiled Florida's insurance markets in recent years, mainly because it's led to rapidly rising premiums, insurers leaving the state and homeowners nearing the end of their ropes. 

Now, that crisis has spread to California, where extreme weather events such as floods and wildfires are having a similar effect on the Golden State's insurance market.

In some ways, both states are victims of their success because their combination of great weather and long coastlines has turned their real estate industries into multibillion-dollar economic engines. Although rapid property appreciation is generally considered a win for most owners, the downside of those surging property values means that insurers must raise premiums to cover potential losses.

However, quickly rising property values are only one factor driving up premiums and causing insurers to leave Florida and California. The growing frequency and intensity of natural disasters are making legacy carriers tap out. In Florida, those disasters have come in the form of hurricanes. California, on the other hand, is seeing wildfires at an unprecedented rate in comparison to years past and the cost of covering the claims is prohibitive for insurers.

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California's Insurer Of Last Resort Becoming The Primary Option

As is the case in Florida, many California insurers have realized that they can't raise premiums quickly enough to cover their potential exposure, and they've stopped providing policies in the state entirely. This is mainly because of the cost of reinsurance, which main-line carriers buy to backstop their losses against massive claims. This exodus of insurers has led many California homeowners to rely on the Fair Access to Insurance Requirements (FAIR) Plan.

This is problematic for several reasons. First, the FAIR Plan website specifies that it's a "temporary safety net" for Californians to solve their fire insurance needs and is not meant to be a permanent option. But as more insurers leave the state, the FAIR Plan is becoming not only a permanent option but the only option for California homeowners. It has expanded from 126,709 policies in 2018 to 350,000 today.

That represents a 25% increase over 2022 policy levels, and it's becoming obvious this last line of defense option is not equipped to handle the increased demand. California updated the FAIR website late last year to accommodate an uptick in demand, but the system is still straining beneath the additional weight. Many policyholders were quoted in a Newsweek article as having to wait weeks or months for a FAIR quote.

The Downstream Effect On The Housing Market

Delays in getting policies and the rapidly rising premiums threaten to put a major kink in the California real estate market. Having insurance is a key requirement for mortgage lenders, and if buyers can't get insurance, or afford the insurance premium quotes they do get, the entire market could be at risk. If this continues, it may become almost impossible for anyone except cash buyers to own property in California.

As the effects of climate change are felt more severely throughout the country, the situation in California and Florida could offer a sobering look at the future of the real estate and insurance markets. It's not going to be a pretty picture if the crisis spreads to other states, but that possibility becomes more likely as the effects of climate change become more severe. 

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