Major Insurer Delivers Massive Sticker Shock To California Homeowners

California homeowners who were looking for relief from high insurance premiums may want to brace themselves for a nasty surprise if they carry Travelers Insurance. The national insurance giant recently announced they would be hiking homeowners' premiums in the Golden State by an average of 15.3%. The move will affect an estimated 320,000 policyholders and goes into effect in June of this year.

Although the average premium increase is 15%, some homeowners will see their rates increase by as much as 25%, which will only place further strain on the budgets of California homeowners. As hard as it may be to believe, the homeowners receiving the premium increases may be the lucky ones in this equation. Travelers also announced plans to cancel 6,600 policies for California homeowners.

The New York-based insurer is citing the increased risk and costs associated with wildfires and other natural disasters like mudslides or floods as the motivation behind both the premium increases and the cancellations. Regardless of whether they received a policy increase or a cancellation, the homeowners affected by this move will find a very difficult market waiting for them if they try to shop for new rates or a replacement policy.

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In recent years, California's insurance market has been getting increasingly difficult for consumers as more and more insurers opt to quit the market entirely rather than deal with the risk of writing policies. In addition to Travelers, major insurance carriers with national recognition like State Farm, Allstate, and Farmers have recently reduced policies and dramatically raised premiums for the policies they renewed.

As recently as March, State Farm announced it would drop 72,000 California homeowners' policies. Like Travelers, all the insurers backing out of California are making these moves based on their fears over covering natural disasters, which are striking the state with more frequency and potency every year. In what can only be taken as an acknowledgment of the deep challenges facing the industry, California's Insurance Commission approved Travelers' rate increases. 

Travelers released a statement to Los Angeles-based KTLA News about the increases, which said in part "The approved adjustments to our California homeowner's insurance rates are a necessary step toward aligning pricing to the risks that our customers are facing." The increases, from Travelers, also come on the heels of a recent proposal by California's Insurance Commissioner to let insurers use predictive modeling to calculate rate increases.

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The Commissioner is also proposing to streamline and expedite the process of approving rate increases. Both moves could pave the way for even higher insurance premiums because currently, insurers are limited to using actual losses from past claims as the basis for rate increases. That specific limitation was introduced in 1988 under a measure known as Proposition 103 which also required insurers to get California Insurance Commission approval before increasing rates.

Since then, property values in California have skyrocketed and insurers say the current model for calculating rates is out of step with the cost and risk of providing homeowners coverage. California Insurance Commissioner Ricardo Lara has said these industry concessions are part of his "Sustainable Insurance Strategy" plan which is designed to keep as many private insurers operating in California as possible. 

Another pressing issue with California's insurance market is that as more insurers exit the state, it only increases the number of homeowners relying on California's state-run FAIR Plan for insurance. Although FAIR advertises itself as an option of last resort, its website is getting thousands of applications per week from homeowners who are priced out by private rates.

Of course, all this only adds to the misery for any Travelers policyholder who just opened up their renewal envelope. They are likely to shop around and discover that they are the lucky ones to have gotten the option to renew at all. Many of their neighbors could be even worse off. The California insurance crisis has not yet affected homeowners as badly as the one in Florida, but it's trending in that direction.

Whatever happens, both the California Insurance Commission and the private insurers operating in the state will have to come to some sort of mutually beneficial arrangement. If they cannot, one of the world's most lucrative real estate markets could be in for an incredibly bumpy ride because it's simply impossible for a multi-trillion-dollar real estate market to exist if property owners can't get insurance. 

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